Suzhou Alton Electrical & Mechanical Industry Co., Ltd. (SZSE:301187) Stock Catapults 28% Though Its Price And Business Still Lag The Market

Suzhou Alton Electrical & Mechanical Industry Co., Ltd. (SZSE:301187) shares have continued their recent momentum with a 28% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 78%.

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 37x, you may still consider Suzhou Alton Electrical & Mechanical Industry as an attractive investment with its 26.7x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Recent times have been pleasing for Suzhou Alton Electrical & Mechanical Industry as its earnings have risen in spite of the market's earnings going into reverse. 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 not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for Suzhou Alton Electrical & Mechanical Industry

Keen to find out how analysts think Suzhou Alton Electrical & Mechanical Industry'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 underperform the market for P/E ratios like Suzhou Alton Electrical & Mechanical Industry's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 56%. The latest three year period has also seen an excellent 32% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next year should generate growth of 24% as estimated by the two analysts watching the company. With the market predicted to deliver 38% growth , the company is positioned for a weaker earnings result.

With this information, we can see why Suzhou Alton Electrical & Mechanical Industry is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Key Takeaway

The latest share price surge wasn't enough to lift Suzhou Alton Electrical & Mechanical Industry's P/E close to the market median. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Suzhou Alton Electrical & Mechanical Industry maintains its low P/E on the weakness of its forecast growth being lower than the wider market, 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.

Having said that, be aware Suzhou Alton Electrical & Mechanical Industry is showing 3 warning signs in our investment analysis, and 2 of those are potentially serious.

Of course, you might also be able to find a better stock than Suzhou Alton Electrical & Mechanical Industry. 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.