Suzhou Secote Precision Electronic Co.,LTD's (SHSE:603283) Business And Shares Still Trailing The Market

Suzhou Secote Precision Electronic Co.,LTD's (SHSE:603283) price-to-earnings (or "P/E") ratio of 15.8x might make it look like a strong buy right now compared to the market in China, where around half of the companies have P/E ratios above 38x and even P/E's above 73x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

Recent times have been pleasing for Suzhou Secote Precision ElectronicLTD as its earnings have risen in spite of the market's earnings going into reverse. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

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Does Growth Match The Low P/E?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Suzhou Secote Precision ElectronicLTD's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 56% last year. The strong recent performance means it was also able to grow EPS by 282% 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.

Looking ahead now, EPS is anticipated to climb by 20% during the coming year according to the two analysts following the company. With the market predicted to deliver 37% growth , the company is positioned for a weaker earnings result.

With this information, we can see why Suzhou Secote Precision ElectronicLTD is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Final Word

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.

As we suspected, our examination of Suzhou Secote Precision ElectronicLTD's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Suzhou Secote Precision ElectronicLTD that you should be aware of.

If you're unsure about the strength of Suzhou Secote Precision ElectronicLTD's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.