Huaqin Technology Co., Ltd. (SHSE:603296) Held Back By Insufficient Growth Even After Shares Climb 33%

Despite an already strong run, Huaqin Technology Co., Ltd. (SHSE:603296) shares have been powering on, with a gain of 33% in the last thirty days. The last month tops off a massive increase of 118% in the last year.

Although its price has surged higher, Huaqin Technology's price-to-earnings (or "P/E") ratio of 32.7x might still 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 72x are quite common. 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 that are retreating more than the market's of late, Huaqin Technology has been very sluggish. 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.

See our latest analysis for Huaqin Technology

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

Does Growth Match The Low P/E?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 13%. Even so, admirably EPS has lifted 32% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Turning to the outlook, the next year should generate growth of 25% as estimated by the six analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 37%, which is noticeably more attractive.

In light of this, it's understandable that Huaqin Technology'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

Huaqin Technology's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Huaqin Technology 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.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for Huaqin Technology with six simple checks will allow you to discover any risks that could be an issue.

If you're unsure about the strength of Huaqin Technology'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.