Even With A 27% Surge, Cautious Investors Are Not Rewarding Feilong Auto Components Co., Ltd.'s (SZSE:002536) Performance Completely

Despite an already strong run, Feilong Auto Components Co., Ltd. (SZSE:002536) shares have been powering on, with a gain of 27% in the last thirty days. The last 30 days bring the annual gain to a very sharp 26%.

Even after such a large jump in price, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 35x, you may still consider Feilong Auto Components as an attractive investment with its 27.7x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Recent times have been pleasing for Feilong Auto Components 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 not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Feilong Auto Components

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Feilong Auto Components.

Does Growth Match The Low P/E?

Feilong Auto Components' P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Retrospectively, the last year delivered an exceptional 37% gain to the company's bottom line. The latest three year period has also seen a 21% overall rise in EPS, aided extensively by its short-term performance. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Shifting to the future, estimates from the sole analyst covering the company suggest earnings should grow by 40% over the next year. With the market predicted to deliver 38% growth , the company is positioned for a comparable earnings result.

In light of this, it's peculiar that Feilong Auto Components' P/E sits below the majority of other companies. It may be that most investors are not convinced the company can achieve future growth expectations.

What We Can Learn From Feilong Auto Components' P/E?

The latest share price surge wasn't enough to lift Feilong Auto Components' P/E close to the market median. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Feilong Auto Components currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. When we see an average earnings outlook with market-like growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Feilong Auto Components you should know about.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.