Shenzhen Honor Electronic Co., Ltd.'s (SZSE:300870) Price Is Right But Growth Is Lacking After Shares Rocket 44%

Shenzhen Honor Electronic Co., Ltd. (SZSE:300870) shares have continued their recent momentum with a 44% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 40% in the last year.

Even after such a large jump in price, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 36x, you may still consider Shenzhen Honor Electronic as an attractive investment with its 22.9x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

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 low because investors think the company's earnings are going to fall away like everyone else's soon. 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 Honor Electronic

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

What Are Growth Metrics Telling Us About The Low P/E?

The only time you'd be truly comfortable seeing a P/E as low as Shenzhen Honor Electronic's is when the company's growth is on track to lag the market.

If we review the last year of earnings growth, the company posted a terrific increase of 244%. Pleasingly, EPS has also lifted 90% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to slump, contracting by 8.4% during the coming year according to the two analysts following the company. That's not great when the rest of the market is expected to grow by 40%.

With this information, we are not surprised that Shenzhen Honor Electronic is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Key Takeaway

The latest share price surge wasn't enough to lift Shenzhen Honor Electronic's P/E close to the market median. 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.

As we suspected, our examination of Shenzhen Honor Electronic's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

Having said that, be aware Shenzhen Honor Electronic is showing 2 warning signs in our investment analysis, you should know about.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.