Shunfa Hengneng Corporation's (SZSE:000631) Shares Bounce 27% But Its Business Still Trails The Market

Shunfa Hengneng Corporation (SZSE:000631) shares have had a really impressive month, gaining 27% after a shaky period beforehand. Unfortunately, despite the strong performance over the last month, the full year gain of 2.2% isn't as attractive.

In spite of the firm bounce in price, Shunfa Hengneng may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 21.5x, since almost half of all companies in China have P/E ratios greater than 30x and even P/E's higher than 58x 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 limited.

With earnings growth that's exceedingly strong of late, Shunfa Hengneng has been doing very well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Check out our latest analysis for Shunfa Hengneng

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 Shunfa Hengneng's earnings, revenue and cash flow.

Does Growth Match The Low P/E?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 115% last year. The strong recent performance means it was also able to grow EPS by 85% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 36% shows it's noticeably less attractive on an annualised basis.

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

The Final Word

Despite Shunfa Hengneng's shares building up a head of steam, its P/E still lags most other companies. 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.

As we suspected, our examination of Shunfa Hengneng revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless the recent medium-term 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 5 warning signs for Shunfa Hengneng you should be aware of, and 2 of them don't sit too well with us.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on 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.