L&K Engineering (Suzhou) Co.,Ltd. (SHSE:603929) Shares Fly 38% But Investors Aren't Buying For Growth

L&K Engineering (Suzhou) Co.,Ltd. (SHSE:603929) shares have had a really impressive month, gaining 38% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 65% in the last year.

Although its price has surged higher, L&K Engineering (Suzhou)Ltd's price-to-earnings (or "P/E") ratio of 13.2x might still 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 32x and even P/E's above 61x 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.

With its earnings growth in positive territory compared to the declining earnings of most other companies, L&K Engineering (Suzhou)Ltd has been doing quite well of late. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, 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.

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

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

Taking a look back first, we see that the company grew earnings per share by an impressive 118% last year. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Turning to the outlook, the next three years should generate growth of 11% per annum as estimated by the lone analyst watching the company. That's shaping up to be materially lower than the 19% each year growth forecast for the broader market.

With this information, we can see why L&K Engineering (Suzhou)Ltd 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 Key Takeaway

Even after such a strong price move, L&K Engineering (Suzhou)Ltd's P/E still trails the rest of the market significantly. 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 L&K Engineering (Suzhou)Ltd maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these 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 L&K Engineering (Suzhou)Ltd that we have uncovered.

If these risks are making you reconsider your opinion on L&K Engineering (Suzhou)Ltd, 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.