Square Technology Group Co.,Ltd's (SHSE:603339) Share Price Boosted 34% But Its Business Prospects Need A Lift Too

Square Technology Group Co.,Ltd (SHSE:603339) shares have continued their recent momentum with a 34% gain in the last month alone. Taking a wider view, although not as strong as the last month, the full year gain of 22% is also fairly reasonable.

Although its price has surged higher, Square Technology GroupLtd may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 16.6x, since almost half of all companies in China have P/E ratios greater than 34x and even P/E's higher than 66x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

For instance, Square Technology GroupLtd's receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. 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 Square Technology GroupLtd

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 Square Technology GroupLtd's earnings, revenue and cash flow.

How Is Square Technology GroupLtd's Growth Trending?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Square Technology GroupLtd's to be considered reasonable.

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 14%. Even so, admirably EPS has lifted 97% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

This is in contrast to the rest of the market, which is expected to grow by 42% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why Square Technology GroupLtd 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

Shares in Square Technology GroupLtd are going to need a lot more upward momentum to get the company's P/E out of its slump. 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 Square Technology GroupLtd maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 2 warning signs for Square Technology GroupLtd you should be aware of, and 1 of them shouldn't be ignored.

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.