Improved Earnings Required Before TES Touch Embedded Solutions (Xiamen) Co., Ltd. (SZSE:003019) Stock's 26% Jump Looks Justified

TES Touch Embedded Solutions (Xiamen) Co., Ltd. (SZSE:003019) shares have continued their recent momentum with a 26% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 51% in the last year.

In spite of the firm bounce in price, TES Touch Embedded Solutions (Xiamen)'s price-to-earnings (or "P/E") ratio of 22.6x might still make it look like a buy right now compared to the market in China, where around half of the companies have P/E ratios above 32x and even P/E's above 60x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

As an illustration, earnings have deteriorated at TES Touch Embedded Solutions (Xiamen) 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 TES Touch Embedded Solutions (Xiamen)

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 TES Touch Embedded Solutions (Xiamen)'s earnings, revenue and cash flow.

Is There Any Growth For TES Touch Embedded Solutions (Xiamen)?

There's an inherent assumption that a company should underperform the market for P/E ratios like TES Touch Embedded Solutions (Xiamen)'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 14%. Still, the latest three year period has seen an excellent 62% overall rise in EPS, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

This is in contrast to the rest of the market, which is expected to grow by 39% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that TES Touch Embedded Solutions (Xiamen)'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 Final Word

Despite TES Touch Embedded Solutions (Xiamen)'s shares building up a head of steam, its P/E still lags most other companies. 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.

As we suspected, our examination of TES Touch Embedded Solutions (Xiamen) 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. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

Plus, you should also learn about this 1 warning sign we've spotted with TES Touch Embedded Solutions (Xiamen).

If you're unsure about the strength of TES Touch Embedded Solutions (Xiamen)'s business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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.