Optimistic Investors Push Shenzhen Honor Electronic Co., Ltd. (SZSE:300870) Shares Up 26% But Growth Is Lacking

Despite an already strong run, Shenzhen Honor Electronic Co., Ltd. (SZSE:300870) shares have been powering on, with a gain of 26% in the last thirty days. The last month tops off a massive increase of 138% in the last year.

Even after such a large jump in price, it's still not a stretch to say that Shenzhen Honor Electronic'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 36x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Shenzhen Honor Electronic certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. One possibility is that the P/E is moderate because investors think the company's earnings will be less resilient 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 not quite in favour.

Check out our latest analysis for Shenzhen Honor Electronic

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Shenzhen Honor Electronic.

Does Growth Match The P/E?

The only time you'd be comfortable seeing a P/E like Shenzhen Honor Electronic's is when the company's growth is tracking the market closely.

Taking a look back first, we see that the company grew earnings per share by an impressive 244% last year. The latest three year period has also seen an excellent 90% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the dual analysts covering the company suggest earnings growth is heading into negative territory, declining 8.4% over the next year. Meanwhile, the broader market is forecast to expand by 38%, which paints a poor picture.

With this information, we find it concerning that Shenzhen Honor Electronic is trading at a fairly similar P/E to the market. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the negative growth outlook.

What We Can Learn From Shenzhen Honor Electronic's P/E?

Shenzhen Honor Electronic's stock has a lot of momentum behind it lately, which has brought its P/E level with the market. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Shenzhen Honor Electronic currently trades on a higher than expected P/E for a company whose earnings are forecast to decline. When we see a poor outlook with earnings heading backwards, we suspect share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Plus, you should also learn about these 2 warning signs we've spotted with Shenzhen Honor Electronic (including 1 which can't be ignored).

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

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.