Qingdao Kutesmart Co.,Ltd.'s (SZSE:300840) 32% Dip In Price Shows Sentiment Is Matching Earnings

Qingdao Kutesmart Co.,Ltd. (SZSE:300840) shareholders that were waiting for something to happen have been dealt a blow with a 32% share price drop in the last month. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 14% in that time.

Although its price has dipped substantially, Qingdao KutesmartLtd may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 12x, since almost half of all companies in China have P/E ratios greater than 31x and even P/E's higher than 57x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

Recent times have been advantageous for Qingdao KutesmartLtd as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Qingdao KutesmartLtd

Keen to find out how analysts think Qingdao KutesmartLtd's future stacks up against the industry? In that case, our free report is a great place to start.

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

There's an inherent assumption that a company should far underperform the market for P/E ratios like Qingdao KutesmartLtd's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 108% last year. Pleasingly, EPS has also lifted 276% 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.

Looking ahead now, EPS is anticipated to slump, contracting by 5.6% during the coming year according to the three analysts following the company. Meanwhile, the broader market is forecast to expand by 38%, which paints a poor picture.

With this information, we are not surprised that Qingdao KutesmartLtd 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. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Final Word

Having almost fallen off a cliff, Qingdao KutesmartLtd's share price has pulled its P/E way down as well. 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 Qingdao KutesmartLtd maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Qingdao KutesmartLtd that 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.