Risks Still Elevated At These Prices As Kinco Automation (Shanghai) Co.,Ltd (SHSE:688160) Shares Dive 28%

Kinco Automation (Shanghai) Co.,Ltd (SHSE:688160) shareholders won't be pleased to see that the share price has had a very rough month, dropping 28% and undoing the prior period's positive performance. Longer-term, the stock has been solid despite a difficult 30 days, gaining 18% in the last year.

Although its price has dipped substantially, Kinco Automation (Shanghai)Ltd's price-to-earnings (or "P/E") ratio of 62.1x might still make it look like a strong sell right now compared to the market in China, where around half of the companies have P/E ratios below 30x and even P/E's below 19x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

As an illustration, earnings have deteriorated at Kinco Automation (Shanghai)Ltd over the last year, which is not ideal at all. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Kinco Automation (Shanghai)Ltd

Although there are no analyst estimates available for Kinco Automation (Shanghai)Ltd, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Enough Growth For Kinco Automation (Shanghai)Ltd?

The only time you'd be truly comfortable seeing a P/E as steep as Kinco Automation (Shanghai)Ltd's is when the company's growth is on track to outshine the market decidedly.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 33%. As a result, earnings from three years ago have also fallen 29% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

In contrast to the company, the rest of the market is expected to grow by 36% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we find it concerning that Kinco Automation (Shanghai)Ltd is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

What We Can Learn From Kinco Automation (Shanghai)Ltd's P/E?

Even after such a strong price drop, Kinco Automation (Shanghai)Ltd's P/E still exceeds the rest of the market significantly. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Kinco Automation (Shanghai)Ltd currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Kinco Automation (Shanghai)Ltd (1 is a bit concerning!) that you need to be mindful of.

Of course, you might also be able to find a better stock than Kinco Automation (Shanghai)Ltd. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.