Why Investors Shouldn't Be Surprised By Shenzhen Lifotronic Technology Co., Ltd.'s (SHSE:688389) Low P/E

Shenzhen Lifotronic Technology Co., Ltd.'s (SHSE:688389) price-to-earnings (or "P/E") ratio of 24x might make it look like a buy right now compared to the market in China, where around half of the companies have P/E ratios above 33x and even P/E's above 61x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's superior to most other companies of late, Shenzhen Lifotronic Technology has been doing relatively well. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for Shenzhen Lifotronic Technology

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

Is There Any Growth For Shenzhen Lifotronic Technology?

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

Retrospectively, the last year delivered an exceptional 25% gain to the company's bottom line. Pleasingly, EPS has also lifted 114% 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.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 22% each year over the next three years. That's shaping up to be materially lower than the 26% per year growth forecast for the broader market.

With this information, we can see why Shenzhen Lifotronic Technology is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Key Takeaway

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.

As we suspected, our examination of Shenzhen Lifotronic Technology's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. 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.

You should always think about risks. Case in point, we've spotted 1 warning sign for Shenzhen Lifotronic Technology 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.