Guangdong KinLong Hardware Products Co.,Ltd.'s (SZSE:002791) 40% Price Boost Is Out Of Tune With Earnings

Guangdong KinLong Hardware Products Co.,Ltd. (SZSE:002791) shareholders would be excited to see that the share price has had a great month, posting a 40% gain and recovering from prior weakness. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 40% in the last twelve months.

After such a large jump in price, Guangdong KinLong Hardware ProductsLtd's price-to-earnings (or "P/E") ratio of 34.7x might make it look like a sell right now compared to the market in China, where around half of the companies have P/E ratios below 29x and even P/E's below 18x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Recent times have been pleasing for Guangdong KinLong Hardware ProductsLtd as its earnings have risen in spite of the market's earnings going into reverse. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. If not, then existing shareholders might be a little nervous about the viability of the share price.

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How Is Guangdong KinLong Hardware ProductsLtd's Growth Trending?

Guangdong KinLong Hardware ProductsLtd's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 126% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 70% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 18% each year during the coming three years according to the nine analysts following the company. That's shaping up to be similar to the 19% per annum growth forecast for the broader market.

With this information, we find it interesting that Guangdong KinLong Hardware ProductsLtd is trading at a high P/E compared to the market. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

The Final Word

Guangdong KinLong Hardware ProductsLtd's P/E is getting right up there since its shares have risen strongly. 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 Guangdong KinLong Hardware ProductsLtd's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Before you settle on your opinion, we've discovered 2 warning signs for Guangdong KinLong Hardware ProductsLtd that you should be aware of.

Of course, you might also be able to find a better stock than Guangdong KinLong Hardware ProductsLtd. 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.