Kangping Technology (Suzhou) Co., Ltd.'s (SZSE:300907) 28% Share Price Surge Not Quite Adding Up

Kangping Technology (Suzhou) Co., Ltd. (SZSE:300907) shareholders would be excited to see that the share price has had a great month, posting a 28% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 72% in the last year.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Kangping Technology (Suzhou)'s P/E ratio of 35.5x, since the median price-to-earnings (or "P/E") ratio in China is also close to 39x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Kangping Technology (Suzhou) certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If that doesn't eventuate, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

View our latest analysis for Kangping Technology (Suzhou)

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Kangping Technology (Suzhou)'s earnings, revenue and cash flow.

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

There's an inherent assumption that a company should be matching the market for P/E ratios like Kangping Technology (Suzhou)'s to be considered reasonable.

Retrospectively, the last year delivered an exceptional 85% gain to the company's bottom line. Pleasingly, EPS has also lifted 53% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Comparing that to the market, which is predicted to deliver 37% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

In light of this, it's curious that Kangping Technology (Suzhou)'s P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as a continuation of recent earnings trends is likely to weigh down the shares eventually.

The Final Word

Kangping Technology (Suzhou)'s stock has a lot of momentum behind it lately, which has brought its P/E level with the market. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Kangping Technology (Suzhou) currently trades on a higher than expected P/E since its recent three-year growth is lower than the wider market forecast. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

You should always think about risks. Case in point, we've spotted 1 warning sign for Kangping Technology (Suzhou) you should be aware of.

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.