The Market Doesn't Like What It Sees From Shenzhen Kinwong Electronic Co., Ltd.'s (SHSE:603228) Earnings Yet

Shenzhen Kinwong Electronic Co., Ltd.'s (SHSE:603228) price-to-earnings (or "P/E") ratio of 22x 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 37x and even P/E's above 73x 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 its earnings growth in positive territory compared to the declining earnings of most other companies, Shenzhen Kinwong Electronic has been doing quite well of late. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Shenzhen Kinwong Electronic

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

Is There Any Growth For Shenzhen Kinwong Electronic?

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 decent 10% gain to the company's bottom line. The latest three year period has also seen a 9.2% overall rise in EPS, aided somewhat by its short-term performance. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 22% over the next year. That's shaping up to be materially lower than the 41% growth forecast for the broader market.

In light of this, it's understandable that Shenzhen Kinwong Electronic's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Final Word

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.

We've established that Shenzhen Kinwong Electronic maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. 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.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Shenzhen Kinwong Electronic that you need to be mindful of.

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.