Optimistic Investors Push Shenzhen Microgate Technology Co., Ltd. (SZSE:300319) Shares Up 36% But Growth Is Lacking

Shenzhen Microgate Technology Co., Ltd. (SZSE:300319) shares have had a really impressive month, gaining 36% after a shaky period beforehand. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 2.6% in the last twelve months.

Even after such a large jump in price, there still wouldn't be many who think Shenzhen Microgate Technology's price-to-earnings (or "P/E") ratio of 31x is worth a mention when the median P/E in China is similar at about 31x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the 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 deteriorate like the rest, which has kept the P/E from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

See 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.

How Is Shenzhen Microgate Technology's Growth Trending?

Shenzhen Microgate Technology's P/E ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the market.

If we review the last year of earnings growth, the company posted a terrific increase of 47%. Pleasingly, EPS has also lifted 86% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the one analyst covering the company suggest earnings should grow by 26% over the next year. Meanwhile, the rest of the market is forecast to expand by 37%, which is noticeably more attractive.

In light of this, it's curious that Shenzhen Microgate Technology's P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

The Final Word

Shenzhen Microgate Technology's stock has a lot of momentum behind it lately, which has brought its P/E level with the market. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of Shenzhen Microgate Technology's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Shenzhen Microgate Technology (of which 1 doesn't sit too well with us!) you should know about.

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.