What Kinco Automation (Shanghai) Co.,Ltd's (SHSE:688160) 25% Share Price Gain Is Not Telling You

Kinco Automation (Shanghai) Co.,Ltd (SHSE:688160) shareholders are no doubt pleased to see that the share price has bounced 25% in the last month, although it is still struggling to make up recently lost ground. Looking further back, the 24% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Since its price has surged higher, Kinco Automation (Shanghai)Ltd may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 71x, since almost half of all companies in China have P/E ratios under 28x and even P/E's lower than 17x are not unusual. 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. If not, then existing shareholders may be quite nervous about the viability of the share price.

Check out our latest analysis for Kinco Automation (Shanghai)Ltd

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Kinco Automation (Shanghai)Ltd will help you shine a light on its historical performance.

What Are Growth Metrics Telling Us About The High P/E?

In order to justify its P/E ratio, Kinco Automation (Shanghai)Ltd would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered a frustrating 33% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 29% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 41% shows it's an unpleasant look.

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. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Bottom Line On Kinco Automation (Shanghai)Ltd's P/E

The strong share price surge has got Kinco Automation (Shanghai)Ltd's P/E rushing to great heights as well. 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.

Our examination of Kinco Automation (Shanghai)Ltd revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You need to take note of risks, for example - Kinco Automation (Shanghai)Ltd has 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

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.