Market Participants Recognise Guangdong KinLong Hardware Products Co.,Ltd.'s (SZSE:002791) Earnings Pushing Shares 37% Higher

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 37% gain and recovering from prior weakness. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 36% over that time.

Following the firm bounce in price, given around half the companies in China have price-to-earnings ratios (or "P/E's") below 32x, you may consider Guangdong KinLong Hardware ProductsLtd as a stock to potentially avoid with its 39.9x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

Recent times have been advantageous for Guangdong KinLong Hardware ProductsLtd as its earnings have been rising faster than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Guangdong KinLong Hardware ProductsLtd

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How Is Guangdong KinLong Hardware ProductsLtd's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as high as Guangdong KinLong Hardware ProductsLtd's is when the company's growth is on track to outshine the market.

If we review the last year of earnings growth, the company posted a terrific increase of 248%. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 59% overall. 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 30% each year during the coming three years according to the ten analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 26% per year, which is noticeably less attractive.

With this information, we can see why Guangdong KinLong Hardware ProductsLtd is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

Guangdong KinLong Hardware ProductsLtd shares have received a push in the right direction, but its P/E is elevated too. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Guangdong KinLong Hardware ProductsLtd maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for Guangdong KinLong Hardware ProductsLtd with six simple checks.

You might be able to find a better investment than Guangdong KinLong Hardware ProductsLtd. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.