Guangdong KinLong Hardware Products Co.,Ltd. (SZSE:002791) Might Not Be As Mispriced As It Looks After Plunging 26%

Guangdong KinLong Hardware Products Co.,Ltd. (SZSE:002791) shareholders that were waiting for something to happen have been dealt a blow with a 26% share price drop in the last month. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 47% in that time.

Even after such a large drop in price, it's still not a stretch to say that Guangdong KinLong Hardware ProductsLtd's price-to-earnings (or "P/E") ratio of 34.4x right now seems quite "middle-of-the-road" compared to the market in China, where the median P/E ratio is around 34x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Guangdong KinLong Hardware ProductsLtd has been struggling lately as its earnings have declined faster than most other companies. 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. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. If not, then existing shareholders may be a little nervous about the viability of the share price.

Check out our latest analysis for Guangdong KinLong Hardware ProductsLtd

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How Is Guangdong KinLong Hardware ProductsLtd's Growth Trending?

There's an inherent assumption that a company should be matching the market for P/E ratios like Guangdong KinLong Hardware ProductsLtd's to be considered reasonable.

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 24%. The last three years don't look nice either as the company has shrunk EPS by 81% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 50% during the coming year according to the eight analysts following the company. With the market only predicted to deliver 38%, the company is positioned for a stronger earnings result.

In light of this, it's curious that Guangdong KinLong Hardware ProductsLtd's 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

Guangdong KinLong Hardware ProductsLtd's plummeting stock price has brought its P/E right back to the rest of the market. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Guangdong KinLong Hardware ProductsLtd currently trades on a lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Guangdong KinLong Hardware ProductsLtd, and understanding should be part of your investment process.

If you're unsure about the strength of Guangdong KinLong Hardware ProductsLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.