Senci Electric Machinery Co.,Ltd. (SHSE:603109) Surges 41% Yet Its Low P/E Is No Reason For Excitement

Senci Electric Machinery Co.,Ltd. (SHSE:603109) shares have had a really impressive month, gaining 41% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 27%.

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 29x, you may still consider Senci Electric MachineryLtd as an attractive investment with its 16.7x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Senci Electric MachineryLtd certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Senci Electric MachineryLtd

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Senci Electric MachineryLtd's earnings, revenue and cash flow.

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

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

If we review the last year of earnings growth, the company posted a terrific increase of 34%. The strong recent performance means it was also able to grow EPS by 90% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

This is in contrast to the rest of the market, which is expected to grow by 41% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why Senci Electric MachineryLtd is trading at a P/E lower than the market. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Final Word

Senci Electric MachineryLtd's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. 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 Senci Electric MachineryLtd maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

It is also worth noting that we have found 1 warning sign for Senci Electric MachineryLtd that you need to take into consideration.

If these risks are making you reconsider your opinion on Senci Electric MachineryLtd, 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.