Shanghai Zhongchen Electronic Technology Co.,Ltd.'s (SHSE:603275) Shares Bounce 26% But Its Business Still Trails The Market

Shanghai Zhongchen Electronic Technology Co.,Ltd. (SHSE:603275) shares have continued their recent momentum with a 26% gain in the last month alone. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 9.2% in the last twelve months.

In spite of the firm bounce in price, Shanghai Zhongchen Electronic TechnologyLtd may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 27.5x, since almost half of all companies in China have P/E ratios greater than 37x and even P/E's higher than 73x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

As an illustration, earnings have deteriorated at Shanghai Zhongchen Electronic TechnologyLtd over the last year, which is not ideal at all. It might be that many expect the disappointing earnings performance to continue or accelerate, 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 Shanghai Zhongchen Electronic TechnologyLtd

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Shanghai Zhongchen Electronic TechnologyLtd will help you shine a light on its historical performance.

Is There Any Growth For Shanghai Zhongchen Electronic TechnologyLtd?

There's an inherent assumption that a company should underperform the market for P/E ratios like Shanghai Zhongchen Electronic TechnologyLtd's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 15%. As a result, earnings from three years ago have also fallen 22% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 39% shows it's an unpleasant look.

With this information, we are not surprised that Shanghai Zhongchen Electronic TechnologyLtd is trading at a P/E lower than the market. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Bottom Line On Shanghai Zhongchen Electronic TechnologyLtd's P/E

Despite Shanghai Zhongchen Electronic TechnologyLtd's shares building up a head of steam, its P/E still lags most other companies. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Shanghai Zhongchen Electronic TechnologyLtd maintains its low P/E on the weakness of its sliding earnings over the medium-term, 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.

Before you take the next step, you should know about the 1 warning sign for Shanghai Zhongchen Electronic TechnologyLtd that we have uncovered.

Of course, you might also be able to find a better stock than Shanghai Zhongchen Electronic TechnologyLtd. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.