Improved Earnings Required Before L&K Engineering (Suzhou) Co.,Ltd. (SHSE:603929) Stock's 27% Jump Looks Justified

L&K Engineering (Suzhou) Co.,Ltd. (SHSE:603929) shareholders have had their patience rewarded with a 27% share price jump in the last month. The last 30 days bring the annual gain to a very sharp 54%.

In spite of the firm bounce in price, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 30x, you may still consider L&K Engineering (Suzhou)Ltd as an attractive investment with its 19.7x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's exceedingly strong of late, L&K Engineering (Suzhou)Ltd has been doing very well. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform 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.

See our latest analysis for L&K Engineering (Suzhou)Ltd

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on L&K Engineering (Suzhou)Ltd will help you shine a light on its historical performance.

How Is L&K Engineering (Suzhou)Ltd's Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like L&K Engineering (Suzhou)Ltd's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 89% gain to the company's bottom line. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

This is in contrast to the rest of the market, which is expected to grow by 35% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that L&K Engineering (Suzhou)Ltd's P/E sits below the majority of other companies. 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.

What We Can Learn From L&K Engineering (Suzhou)Ltd's P/E?

Despite L&K Engineering (Suzhou)Ltd's shares building up a head of steam, its P/E still lags most other companies. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that L&K Engineering (Suzhou)Ltd 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.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for L&K Engineering (Suzhou)Ltd that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.