A Piece Of The Puzzle Missing From Mesnac Co., Ltd.'s (SZSE:002073) 27% Share Price Climb

Mesnac Co., Ltd. (SZSE:002073) shareholders are no doubt pleased to see that the share price has bounced 27% in the last month, although it is still struggling to make up recently lost ground. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 9.9% over the last year.

In spite of the firm bounce in price, Mesnac may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 20.9x, since almost half of all companies in China have P/E ratios greater than 30x and even P/E's higher than 55x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's exceedingly strong of late, Mesnac has been doing very well. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for Mesnac

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Mesnac's earnings, revenue and cash flow.

Does Growth Match The Low P/E?

The only time you'd be truly comfortable seeing a P/E as low as Mesnac'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 63% last year. The latest three year period has also seen an excellent 998% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 41% shows it's noticeably more attractive on an annualised basis.

With this information, we find it odd that Mesnac is trading at a P/E lower than the market. It looks like most investors are not convinced the company can maintain its recent growth rates.

The Final Word

Despite Mesnac's shares building up a head of steam, its P/E still lags most other companies. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of Mesnac revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Mesnac that you should be aware of.

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.