Shenzhen KSTAR Science and Technology Co., Ltd.'s (SZSE:002518) Share Price Boosted 26% But Its Business Prospects Need A Lift Too

Shenzhen KSTAR Science and Technology Co., Ltd. (SZSE:002518) shareholders are no doubt pleased to see that the share price has bounced 26% in the last month, although it is still struggling to make up recently lost ground. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 49% in the last twelve months.

Although its price has surged higher, Shenzhen KSTAR Science and Technology may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 15.7x, since almost half of all companies in China have P/E ratios greater than 31x and even P/E's higher than 56x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Recent times have been pleasing for Shenzhen KSTAR Science and Technology as its earnings have risen in spite of the market's earnings going into reverse. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

See our latest analysis for Shenzhen KSTAR Science and Technology

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Shenzhen KSTAR Science and Technology.

Does Growth Match The Low P/E?

The only time you'd be truly comfortable seeing a P/E as low as Shenzhen KSTAR Science and Technology'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 66% last year. The strong recent performance means it was also able to grow EPS by 180% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 15% during the coming year according to the eight analysts following the company. Meanwhile, the rest of the market is forecast to expand by 41%, which is noticeably more attractive.

In light of this, it's understandable that Shenzhen KSTAR Science and Technology's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Key Takeaway

The latest share price surge wasn't enough to lift Shenzhen KSTAR Science and Technology's P/E close to the market median. 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.

As we suspected, our examination of Shenzhen KSTAR Science and Technology's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Shenzhen KSTAR Science and Technology that you need to be mindful of.

Of course, you might also be able to find a better stock than Shenzhen KSTAR Science and Technology. 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.