Longxing Technology Group Co., Ltd.'s (SZSE:002442) Shares Bounce 25% But Its Business Still Trails The Market

Despite an already strong run, Longxing Technology Group Co., Ltd. (SZSE:002442) shares have been powering on, with a gain of 25% in the last thirty days. The last 30 days bring the annual gain to a very sharp 47%.

Although its price has surged higher, Longxing Technology Group may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 29.8x, since almost half of all companies in China have P/E ratios greater than 39x and even P/E's higher than 75x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Longxing Technology Group has been doing a decent job lately as it's been growing earnings at a reasonable pace. It might be that many expect the respectable earnings performance to degrade, which has repressed the P/E. If that doesn't eventuate, then existing shareholders may have reason to be optimistic about the future direction of the share price.

View our latest analysis for Longxing Technology Group

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 Longxing Technology Group's earnings, revenue and cash flow.

Is There Any Growth For Longxing Technology Group?

In order to justify its P/E ratio, Longxing Technology Group would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered a decent 2.9% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen an unpleasant 43% overall drop in EPS. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

In contrast to the company, the rest of the market is expected to grow by 37% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we are not surprised that Longxing Technology Group is trading at a P/E lower than the market. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Key Takeaway

Despite Longxing Technology Group's shares building up a head of steam, its P/E still lags most other companies. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Longxing Technology Group revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

Plus, you should also learn about these 3 warning signs we've spotted with Longxing Technology Group (including 2 which are concerning).

If these risks are making you reconsider your opinion on Longxing Technology Group, explore our interactive list of high quality stocks to get an idea of what else is out there.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.