A Piece Of The Puzzle Missing From Shenzhen Hopewind Electric Co., Ltd.'s (SHSE:603063) 25% Share Price Climb

Shenzhen Hopewind Electric Co., Ltd. (SHSE:603063) shareholders have had their patience rewarded with a 25% share price jump in the last month. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 22% over that time.

Although its price has surged higher, Shenzhen Hopewind Electric's price-to-earnings (or "P/E") ratio of 23x 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.

Recent times haven't been advantageous for Shenzhen Hopewind Electric as its earnings have been falling quicker than most other companies. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. You'd much rather the company wasn't bleeding earnings if you still believe in the business. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.

View our latest analysis for Shenzhen Hopewind Electric

Keen to find out how analysts think Shenzhen Hopewind Electric's future stacks up against the industry? In that case, our free report is a great place to start.

What Are Growth Metrics Telling Us About The Low P/E?

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

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 30%. Still, the latest three year period has seen an excellent 71% overall rise in EPS, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 62% over the next year. Meanwhile, the rest of the market is forecast to only expand by 41%, which is noticeably less attractive.

With this information, we find it odd that Shenzhen Hopewind Electric is trading at a P/E lower than the market. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

The Final Word

The latest share price surge wasn't enough to lift Shenzhen Hopewind Electric's P/E close to the market median. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Shenzhen Hopewind Electric currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Shenzhen Hopewind Electric, and understanding should be part of your investment process.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.