Improved Earnings Required Before Shenzhen Kingkey Smart Agriculture Times Co.,Ltd (SZSE:000048) Shares Find Their Feet

With a price-to-earnings (or "P/E") ratio of 7.4x Shenzhen Kingkey Smart Agriculture Times Co.,Ltd (SZSE:000048) may be sending very bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 39x and even P/E's higher than 77x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

Shenzhen Kingkey Smart Agriculture TimesLtd has been struggling lately as its earnings have declined faster than most other companies. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. You'd much rather the company wasn't bleeding earnings if you still believe in the business. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.

View our latest analysis for Shenzhen Kingkey Smart Agriculture TimesLtd

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Does Growth Match The Low P/E?

The only time you'd be truly comfortable seeing a P/E as depressed as Shenzhen Kingkey Smart Agriculture TimesLtd's is when the company's growth is on track to lag the market decidedly.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 47%. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 14% as estimated by the sole analyst watching the company. With the market predicted to deliver 37% growth , that's a disappointing outcome.

With this information, we are not surprised that Shenzhen Kingkey Smart Agriculture TimesLtd 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 Key Takeaway

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 Shenzhen Kingkey Smart Agriculture TimesLtd's analyst forecasts revealed that its outlook for shrinking earnings 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.

Having said that, be aware Shenzhen Kingkey Smart Agriculture TimesLtd is showing 2 warning signs in our investment analysis, and 1 of those can't be ignored.

If you're unsure about the strength of Shenzhen Kingkey Smart Agriculture TimesLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.