HeNan Splendor Science & Technology Co., Ltd.'s (SZSE:002296) Price Is Right But Growth Is Lacking After Shares Rocket 27%

Despite an already strong run, HeNan Splendor Science & Technology Co., Ltd. (SZSE:002296) shares have been powering on, with a gain of 27% in the last thirty days. Taking a wider view, although not as strong as the last month, the full year gain of 25% is also fairly reasonable.

In spite of the firm bounce in price, HeNan Splendor Science & Technology may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 22x, since almost half of all companies in China have P/E ratios greater than 37x and even P/E's higher than 73x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

HeNan Splendor Science & Technology certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for HeNan Splendor Science & Technology

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on HeNan Splendor Science & Technology will help you shine a light on its historical performance.

How Is HeNan Splendor Science & Technology's Growth Trending?

HeNan Splendor Science & Technology's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Retrospectively, the last year delivered an exceptional 63% gain to the company's bottom line. Pleasingly, EPS has also lifted 53% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 39% shows it's noticeably less attractive on an annualised basis.

With this information, we can see why HeNan Splendor Science & Technology is trading at a P/E lower than the market. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Key Takeaway

The latest share price surge wasn't enough to lift HeNan Splendor Science & Technology's P/E close to the market median. 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.

As we suspected, our examination of HeNan Splendor Science & Technology revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Having said that, be aware HeNan Splendor Science & Technology is showing 2 warning signs in our investment analysis, you should know about.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.