There's No Escaping Create Technology & Science Co.,Ltd.'s (SZSE:000551) Muted Earnings Despite A 53% Share Price Rise

The Create Technology & Science Co.,Ltd. (SZSE:000551) share price has done very well over the last month, posting an excellent gain of 53%. The last 30 days bring the annual gain to a very sharp 34%.

Although its price has surged higher, Create Technology & ScienceLtd's price-to-earnings (or "P/E") ratio of 24.8x 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 33x and even P/E's above 63x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

The earnings growth achieved at Create Technology & ScienceLtd over the last year would be more than acceptable for most companies. 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 Create Technology & ScienceLtd

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

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

The only time you'd be truly comfortable seeing a P/E as low as Create Technology & ScienceLtd's is when the company's growth is on track to lag the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 25% last year. The latest three year period has also seen an excellent 68% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 37% shows it's noticeably less attractive on an annualised basis.

In light of this, it's understandable that Create Technology & ScienceLtd'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.

The Key Takeaway

Create Technology & ScienceLtd's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. 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.

As we suspected, our examination of Create Technology & ScienceLtd revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Create Technology & ScienceLtd with six simple checks on some of these key factors.

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.