Shenzhen Megmeet Electrical Co., LTD's (SZSE:002851) 42% Price Boost Is Out Of Tune With Earnings

Shenzhen Megmeet Electrical Co., LTD (SZSE:002851) shares have continued their recent momentum with a 42% gain in the last month alone. The annual gain comes to 143% following the latest surge, making investors sit up and take notice.

After such a large jump in price, Shenzhen Megmeet Electrical may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 54.7x, since almost half of all companies in China have P/E ratios under 34x and even P/E's lower than 19x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Recent times haven't been advantageous for Shenzhen Megmeet Electrical as its earnings have been falling quicker than most other companies. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. If not, then existing shareholders may be very nervous about the viability of the share price.

View our latest analysis for Shenzhen Megmeet Electrical

Want the full picture on analyst estimates for the company? Then our free report on Shenzhen Megmeet Electrical will help you uncover what's on the horizon.

Is There Enough Growth For Shenzhen Megmeet Electrical?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Shenzhen Megmeet Electrical's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 14% decrease to the company's bottom line. Regardless, EPS has managed to lift by a handy 19% in aggregate from three years ago, thanks to the earlier period of growth. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.

Looking ahead now, EPS is anticipated to climb by 36% during the coming year according to the six analysts following the company. Meanwhile, the rest of the market is forecast to expand by 38%, which is not materially different.

In light of this, it's curious that Shenzhen Megmeet Electrical's P/E sits above the majority of other companies. 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.

What We Can Learn From Shenzhen Megmeet Electrical's P/E?

Shenzhen Megmeet Electrical's P/E is flying high just like its stock has during the last month. 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.

Our examination of Shenzhen Megmeet Electrical's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Plus, you should also learn about these 3 warning signs we've spotted with Shenzhen Megmeet Electrical.

You might be able to find a better investment than Shenzhen Megmeet Electrical. 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).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.