Subdued Growth No Barrier To Shenzhen Huaqiang Industry Co., Ltd. (SZSE:000062) With Shares Advancing 34%

Shenzhen Huaqiang Industry Co., Ltd. (SZSE:000062) shareholders would be excited to see that the share price has had a great month, posting a 34% gain and recovering from prior weakness. Notwithstanding the latest gain, the annual share price return of 4.2% isn't as impressive.

After such a large jump in price, Shenzhen Huaqiang Industry may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 30.3x, since almost half of all companies in China have P/E ratios under 27x and even P/E's lower than 16x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

For instance, Shenzhen Huaqiang Industry's receding earnings in recent times would have to be some food for thought. 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 Shenzhen Huaqiang Industry

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Is There Enough Growth For Shenzhen Huaqiang Industry?

Shenzhen Huaqiang Industry's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 53%. The last three years don't look nice either as the company has shrunk EPS by 46% in aggregate. 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.

In light of this, it's alarming that Shenzhen Huaqiang Industry's P/E sits above the majority of other companies. 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 Key Takeaway

Shenzhen Huaqiang Industry shares have received a push in the right direction, but its P/E is elevated too. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Shenzhen Huaqiang Industry currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. 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.

Before you settle on your opinion, we've discovered 4 warning signs for Shenzhen Huaqiang Industry (1 doesn't sit too well with us!) that you should be aware of.

If these risks are making you reconsider your opinion on Shenzhen Huaqiang Industry, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.