Improved Earnings Required Before ChangZhou KAIDI Electrical Inc. (SHSE:605288) Stock's 26% Jump Looks Justified

Those holding ChangZhou KAIDI Electrical Inc. (SHSE:605288) shares would be relieved that the share price has rebounded 26% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 15% over that time.

Although its price has surged higher, ChangZhou KAIDI Electrical's price-to-earnings (or "P/E") ratio of 26x might still make it look like a buy right now compared to the market in China, where around half of the companies have P/E ratios above 30x and even P/E's above 55x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

ChangZhou KAIDI Electrical has been doing a good job lately as it's been growing earnings at a solid pace. It might be that many expect the respectable earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

See our latest analysis for ChangZhou KAIDI Electrical

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on ChangZhou KAIDI Electrical will help you shine a light on its historical performance.

Does Growth Match The Low P/E?

There's an inherent assumption that a company should underperform the market for P/E ratios like ChangZhou KAIDI Electrical's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 27% gain to the company's bottom line. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 55% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Comparing that to the market, which is predicted to deliver 41% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

In light of this, it's understandable that ChangZhou KAIDI Electrical's P/E would sit below the majority of other companies. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Bottom Line On ChangZhou KAIDI Electrical's P/E

The latest share price surge wasn't enough to lift ChangZhou KAIDI Electrical's P/E close to the market median. 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 ChangZhou KAIDI Electrical maintains its low P/E on the weakness of its sliding earnings over the medium-term, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

It is also worth noting that we have found 2 warning signs for ChangZhou KAIDI Electrical (1 is significant!) that you need to take into consideration.

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.