The Market Lifts Shenzhen Megmeet Electrical Co., LTD (SZSE:002851) Shares 27% But It Can Do More

Shenzhen Megmeet Electrical Co., LTD (SZSE:002851) shareholders would be excited to see that the share price has had a great month, posting a 27% 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 19% over that time.

Although its price has surged higher, Shenzhen Megmeet Electrical may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 21.5x, since almost half of all companies in China have P/E ratios greater than 33x and even P/E's higher than 61x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

With earnings growth that's superior to most other companies of late, Shenzhen Megmeet Electrical has been doing relatively well. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. 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.

View our latest analysis for Shenzhen Megmeet Electrical

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Does Growth Match The Low P/E?

In order to justify its P/E ratio, Shenzhen Megmeet Electrical would need to produce sluggish growth that's trailing the market.

If we review the last year of earnings growth, the company posted a worthy increase of 8.6%. This was backed up an excellent period prior to see EPS up by 38% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 23% each year during the coming three years according to the four analysts following the company. Meanwhile, the rest of the market is forecast to expand by 26% per annum, which is not materially different.

In light of this, it's peculiar that Shenzhen Megmeet Electrical's P/E sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting lower selling prices.

The Final Word

Despite Shenzhen Megmeet Electrical's shares building up a head of steam, its P/E still lags most other companies. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Shenzhen Megmeet Electrical currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. When we see an average earnings outlook with market-like growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

You should always think about risks. Case in point, we've spotted 2 warning signs for Shenzhen Megmeet Electrical you should be aware of, and 1 of them is concerning.

Of course, you might also be able to find a better stock than Shenzhen Megmeet Electrical. 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.