Optimistic Investors Push ShenzhenJingQuanHua Electronics Co.,Ltd. (SZSE:002885) Shares Up 35% But Growth Is Lacking

ShenzhenJingQuanHua Electronics Co.,Ltd. (SZSE:002885) shareholders are no doubt pleased to see that the share price has bounced 35% 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 47% in the last twelve months.

After such a large jump in price, given around half the companies in China have price-to-earnings ratios (or "P/E's") below 29x, you may consider ShenzhenJingQuanHua ElectronicsLtd as a stock to potentially avoid with its 37.5x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

For instance, ShenzhenJingQuanHua ElectronicsLtd'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.

View our latest analysis for ShenzhenJingQuanHua ElectronicsLtd

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on ShenzhenJingQuanHua ElectronicsLtd's earnings, revenue and cash flow.

How Is ShenzhenJingQuanHua ElectronicsLtd's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as high as ShenzhenJingQuanHua ElectronicsLtd's is when the company's growth is on track to outshine the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 14%. Even so, admirably EPS has lifted 107% in aggregate from three years ago, notwithstanding the last 12 months. 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.

This is in contrast to the rest of the market, which is expected to grow by 41% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it concerning that ShenzhenJingQuanHua ElectronicsLtd is trading at a P/E higher than the market. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Final Word

The large bounce in ShenzhenJingQuanHua ElectronicsLtd's shares has lifted the company's P/E to a fairly high level. 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 ShenzhenJingQuanHua ElectronicsLtd currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Before you settle on your opinion, we've discovered 2 warning signs for ShenzhenJingQuanHua ElectronicsLtd that you should be aware of.

You might be able to find a better investment than ShenzhenJingQuanHua ElectronicsLtd. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.