What Shennan Circuit Company Limited's (SZSE:002916) 31% Share Price Gain Is Not Telling You

Shennan Circuit Company Limited (SZSE:002916) 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. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 14% over that time.

Even after such a large jump in price, it's still not a stretch to say that Shennan Circuit's price-to-earnings (or "P/E") ratio of 26.4x right now seems quite "middle-of-the-road" compared to the market in China, where the median P/E ratio is around 29x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Shennan Circuit has been struggling lately as its earnings have declined faster than most other companies. One possibility is that the P/E is moderate because investors think the company's earnings trend will eventually fall in line with most others in the market. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. If not, then existing shareholders may be a little nervous about the viability of the share price.

Check out our latest analysis for Shennan Circuit

Want the full picture on analyst estimates for the company? Then our free report on Shennan Circuit will help you uncover what's on the horizon.

What Are Growth Metrics Telling Us About The P/E?

There's an inherent assumption that a company should be matching the market for P/E ratios like Shennan Circuit's to be considered reasonable.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 18%. This means it has also seen a slide in earnings over the longer-term as EPS is down 14% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 19% over the next year. Meanwhile, the rest of the market is forecast to expand by 41%, which is noticeably more attractive.

In light of this, it's curious that Shennan Circuit's P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From Shennan Circuit's P/E?

Shennan Circuit's stock has a lot of momentum behind it lately, which has brought its P/E level with the market. 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.

Our examination of Shennan Circuit's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

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

If you're unsure about the strength of Shennan Circuit's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.