Earnings Working Against Shenzhen Microgate Technology Co., Ltd.'s (SZSE:300319) Share Price

Shenzhen Microgate Technology Co., Ltd.'s (SZSE:300319) price-to-earnings (or "P/E") ratio of 34.3x might 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 40x and even P/E's above 78x 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.

Shenzhen Microgate Technology certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Shenzhen Microgate Technology

Keen to find out how analysts think Shenzhen Microgate Technology's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Any Growth For Shenzhen Microgate Technology?

The only time you'd be truly comfortable seeing a P/E as low as Shenzhen Microgate Technology's is when the company's growth is on track to lag the market.

Retrospectively, the last year delivered an exceptional 48% gain to the company's bottom line. The latest three year period has also seen an excellent 42% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the one analyst covering the company suggest earnings should grow by 19% over the next year. That's shaping up to be materially lower than the 37% growth forecast for the broader market.

With this information, we can see why Shenzhen Microgate Technology is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Final Word

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Shenzhen Microgate Technology's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Shenzhen Microgate Technology that you need to be mindful of.

If you're unsure about the strength of Shenzhen Microgate Technology'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.