Improved Earnings Required Before Shenzhen Kinwong Electronic Co., Ltd. (SHSE:603228) Stock's 25% Jump Looks Justified

The Shenzhen Kinwong Electronic Co., Ltd. (SHSE:603228) share price has done very well over the last month, posting an excellent gain of 25%. Taking a wider view, although not as strong as the last month, the full year gain of 12% is also fairly reasonable.

In spite of the firm bounce in price, Shenzhen Kinwong Electronic may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 20.8x, since almost half of all companies in China have P/E ratios greater than 32x and even P/E's higher than 60x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

While the market has experienced earnings growth lately, Shenzhen Kinwong Electronic's earnings have gone into reverse gear, which is not great. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If you still 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.

View our latest analysis for Shenzhen Kinwong Electronic

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Does Growth Match The Low P/E?

The only time you'd be truly comfortable seeing a P/E as low as Shenzhen Kinwong Electronic's is when the company's growth is on track to lag the market.

Retrospectively, the last year delivered a frustrating 5.3% decrease to the company's bottom line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 8.6% overall rise in EPS. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.

Looking ahead now, EPS is anticipated to climb by 17% per year during the coming three years according to the four analysts following the company. With the market predicted to deliver 26% growth each year, the company is positioned for a weaker earnings result.

In light of this, it's understandable that Shenzhen Kinwong Electronic's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Final Word

Shenzhen Kinwong Electronic's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of Shenzhen Kinwong Electronic's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

You always need to take note of risks, for example - Shenzhen Kinwong Electronic has 1 warning sign we think you should be aware of.

You might be able to find a better investment than Shenzhen Kinwong Electronic. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.