Hebei Keli Automobile Equipment Co., Ltd.'s (SZSE:301552) Shares Leap 36% Yet They're Still Not Telling The Full Story

Hebei Keli Automobile Equipment Co., Ltd. (SZSE:301552) shareholders would be excited to see that the share price has had a great month, posting a 36% gain and recovering from prior weakness. Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.

In spite of the firm bounce in price, Hebei Keli Automobile Equipment's price-to-earnings (or "P/E") ratio of 24.4x 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 34x and even P/E's above 67x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Earnings have risen firmly for Hebei Keli Automobile Equipment recently, which is pleasing to see. It might be that many expect the respectable earnings performance to degrade substantially, 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.

Check out our latest analysis for Hebei Keli Automobile Equipment

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Hebei Keli Automobile Equipment will help you shine a light on its historical performance.

Does Growth Match The Low P/E?

There's an inherent assumption that a company should underperform the market for P/E ratios like Hebei Keli Automobile Equipment's to be considered reasonable.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 13% last year. This was backed up an excellent period prior to see EPS up by 172% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

It's interesting to note that the rest of the market is similarly expected to grow by 37% over the next year, which is fairly even with the company's recent medium-term annualised growth rates.

With this information, we find it odd that Hebei Keli Automobile Equipment is trading at a P/E lower than the market. Apparently some shareholders are more bearish than recent times would indicate and have been accepting lower selling prices.

The Key Takeaway

The latest share price surge wasn't enough to lift Hebei Keli Automobile Equipment's P/E close to the market median. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Hebei Keli Automobile Equipment revealed its three-year earnings trends aren't contributing to its P/E as much as we would have predicted, given they look similar to current market expectations. When we see average earnings with market-like growth, we assume potential risks are what might be placing pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions should normally provide more support to the share price.

You should always think about risks. Case in point, we've spotted 1 warning sign for Hebei Keli Automobile Equipment you should be aware of.

If these risks are making you reconsider your opinion on Hebei Keli Automobile Equipment, 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.