Shanghai Kelai Mechatronics Engineering Co.,Ltd.'s (SHSE:603960) Shares Climb 27% But Its Business Is Yet to Catch Up

Shanghai Kelai Mechatronics Engineering Co.,Ltd. (SHSE:603960) shares have had a really impressive month, gaining 27% after a shaky period beforehand. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 28% over that time.

Since its price has surged higher, Shanghai Kelai Mechatronics EngineeringLtd may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 79.5x, since almost half of all companies in China have P/E ratios under 39x and even P/E's lower than 22x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Shanghai Kelai Mechatronics EngineeringLtd has been doing quite well of late. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Shanghai Kelai Mechatronics EngineeringLtd

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Shanghai Kelai Mechatronics EngineeringLtd.

Does Growth Match The High P/E?

Shanghai Kelai Mechatronics EngineeringLtd's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

If we review the last year of earnings growth, the company posted a worthy increase of 5.8%. However, due to its less than impressive performance prior to this period, EPS growth is practically non-existent over the last three years overall. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Looking ahead now, EPS is anticipated to climb by 40% during the coming year according to the one analyst following the company. With the market predicted to deliver 37% growth , the company is positioned for a comparable earnings result.

With this information, we find it interesting that Shanghai Kelai Mechatronics EngineeringLtd is trading at a high P/E compared to the market. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

The Key Takeaway

Shares in Shanghai Kelai Mechatronics EngineeringLtd have built up some good momentum lately, which has really inflated its P/E. 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.

Our examination of Shanghai Kelai Mechatronics EngineeringLtd's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for Shanghai Kelai Mechatronics EngineeringLtd with six simple checks will allow you to discover any risks that could be an issue.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on 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.