A Piece Of The Puzzle Missing From Wuxi Longsheng Technology Co.,Ltd's (SZSE:300680) 25% Share Price Climb

Wuxi Longsheng Technology Co.,Ltd (SZSE:300680) shares have had a really impressive month, gaining 25% after a shaky period beforehand. The annual gain comes to 103% following the latest surge, making investors sit up and take notice.

Although its price has surged higher, Wuxi Longsheng TechnologyLtd may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 30.8x, since almost half of all companies in China have P/E ratios greater than 35x and even P/E's higher than 67x are not unusual. 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 Wuxi Longsheng TechnologyLtd 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.

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How Is Wuxi Longsheng TechnologyLtd's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as low as Wuxi Longsheng TechnologyLtd's is when the company's growth is on track to lag the market.

Retrospectively, the last year delivered an exceptional 91% gain to the company's bottom line. The latest three year period has also seen an excellent 77% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next year should generate growth of 43% as estimated by the three analysts watching the company. With the market only predicted to deliver 38%, the company is positioned for a stronger earnings result.

With this information, we find it odd that Wuxi Longsheng TechnologyLtd is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Final Word

Wuxi Longsheng TechnologyLtd's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Wuxi Longsheng TechnologyLtd's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

Having said that, be aware Wuxi Longsheng TechnologyLtd is showing 2 warning signs in our investment analysis, you should know about.

If these risks are making you reconsider your opinion on Wuxi Longsheng TechnologyLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.