There's No Escaping HeNan Splendor Science & Technology Co., Ltd.'s (SZSE:002296) Muted Earnings Despite A 26% Share Price Rise

The HeNan Splendor Science & Technology Co., Ltd. (SZSE:002296) share price has done very well over the last month, posting an excellent gain of 26%. The annual gain comes to 110% following the latest surge, making investors sit up and take notice.

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 23.4x, since almost half of all companies in China have P/E ratios greater than 37x and even P/E's higher than 72x 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.

With earnings growth that's exceedingly strong of late, HeNan Splendor Science & Technology has been doing very well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. 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

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Is There Any Growth For HeNan Splendor Science & Technology?

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 an exceptional 63% gain to the company's bottom line. The latest three year period has also seen an excellent 53% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 38% 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 Bottom Line On HeNan Splendor Science & Technology's P/E

The latest share price surge wasn't enough to lift HeNan Splendor Science & Technology's P/E close to the market median. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

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. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

It is also worth noting that we have found 2 warning signs for HeNan Splendor Science & Technology that you need to take into consideration.

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.

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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.