There's No Escaping HeNan Splendor Science & Technology Co., Ltd.'s (SZSE:002296) Muted Earnings Despite A 31% Share Price Rise

HeNan Splendor Science & Technology Co., Ltd. (SZSE:002296) shareholders are no doubt pleased to see that the share price has bounced 31% in the last month, although it is still struggling to make up recently lost ground. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 29% in the last twelve months.

Even after such a large jump 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 22.3x, since almost half of all companies in China have P/E ratios greater than 31x and even P/E's higher than 55x 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 limited.

As an illustration, earnings have deteriorated at HeNan Splendor Science & Technology over the last year, which is not ideal at all. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

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?

In order to justify its P/E ratio, HeNan Splendor Science & Technology would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered a frustrating 8.0% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 49% in total over the last three years. 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.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 41% shows it's noticeably less attractive on an annualised basis.

In light of this, it's understandable that HeNan Splendor Science & Technology's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

The Key Takeaway

HeNan Splendor Science & Technology's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. 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 HeNan Splendor Science & Technology maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. 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.

We don't want to rain on the parade too much, but we did also find 2 warning signs for HeNan Splendor Science & Technology that you need to be mindful of.

If these risks are making you reconsider your opinion on HeNan Splendor Science & Technology, explore our interactive list of high quality stocks to get an idea of what else is out there.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.