Even With A 28% Surge, Cautious Investors Are Not Rewarding OKE Precision Cutting Tools Co., Ltd.'s (SHSE:688308) Performance Completely

OKE Precision Cutting Tools Co., Ltd. (SHSE:688308) shares have had a really impressive month, gaining 28% after a shaky period beforehand. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 2.2% in the last twelve months.

Although its price has surged higher, there still wouldn't be many who think OKE Precision Cutting Tools' price-to-earnings (or "P/E") ratio of 34.9x is worth a mention when the median P/E in China is similar at about 38x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

With earnings that are retreating more than the market's of late, OKE Precision Cutting Tools has been very sluggish. One possibility is that the P/E is moderate because investors think the company's earnings trend will eventually fall in line with most others in the market. You'd much rather the company wasn't bleeding earnings if you still believe in the business. Or at the very least, you'd be hoping it doesn't keep underperforming if your plan is to pick up some stock while it's not in favour.

See our latest analysis for OKE Precision Cutting Tools

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Does Growth Match The P/E?

The only time you'd be comfortable seeing a P/E like OKE Precision Cutting Tools' is when the company's growth is tracking the market closely.

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 56%. This means it has also seen a slide in earnings over the longer-term as EPS is down 60% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 95% as estimated by the three analysts watching the company. With the market only predicted to deliver 37%, the company is positioned for a stronger earnings result.

In light of this, it's curious that OKE Precision Cutting Tools' P/E sits in line with the majority of other companies. It may be that most investors aren't convinced the company can achieve future growth expectations.

The Key Takeaway

Its shares have lifted substantially and now OKE Precision Cutting Tools' P/E is also back up 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 OKE Precision Cutting Tools currently trades on a lower than expected P/E since its forecast growth is higher than the wider market. There could be some unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. It appears some are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

We don't want to rain on the parade too much, but we did also find 3 warning signs for OKE Precision Cutting Tools (1 makes us a bit uncomfortable!) that you need to be mindful of.

Of course, you might also be able to find a better stock than OKE Precision Cutting Tools. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.