Shenzhen Honor Electronic Co., Ltd. (SZSE:300870) shares have continued their recent momentum with a 27% gain in the last month alone. The last month tops off a massive increase of 106% in the last year.

In spite of the firm bounce in price, Shenzhen Honor Electronic's price-to-earnings (or "P/E") ratio of 29x might still make it look like a buy right now compared to the market in China, where around half of the companies have P/E ratios above 38x and even P/E's above 75x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Recent times have been pleasing for Shenzhen Honor Electronic as its earnings have risen in spite of the market's earnings going into reverse. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Is There Any Growth For Shenzhen Honor Electronic?

In order to justify its P/E ratio, Shenzhen Honor Electronic would need to produce sluggish growth that's trailing the market.

If we review the last year of earnings growth, the company posted a terrific increase of 244%. Pleasingly, EPS has also lifted 90% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the two analysts covering the company suggest earnings growth is heading into negative territory, declining 8.4% over the next year. Meanwhile, the broader market is forecast to expand by 38%, which paints a poor picture.

In light of this, it's understandable that Shenzhen Honor Electronic's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Final Word

The latest share price surge wasn't enough to lift Shenzhen Honor Electronic's P/E close to the market median. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Shenzhen Honor Electronic maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Having said that, be aware Shenzhen Honor Electronic is showing 2 warning signs in our investment analysis, you should know about.

You might be able to find a better investment than Shenzhen Honor Electronic. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.