Optimistic Investors Push Shenzhen Longood Intelligent Electric Co.,LTD (SZSE:300543) Shares Up 33% But Growth Is Lacking

Shenzhen Longood Intelligent Electric Co.,LTD (SZSE:300543) shareholders are no doubt pleased to see that the share price has bounced 33% 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 19% over that time.

In spite of the firm bounce in price, it's still not a stretch to say that Shenzhen Longood Intelligent ElectricLTD's price-to-earnings (or "P/E") ratio of 31.5x right now seems quite "middle-of-the-road" compared to the market in China, where the median P/E ratio is around 30x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Earnings have risen firmly for Shenzhen Longood Intelligent ElectricLTD recently, which is pleasing to see. One possibility is that the P/E is moderate because investors think this respectable earnings growth might not be enough to outperform the broader market in the near future. 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 not quite in favour.

View our latest analysis for Shenzhen Longood Intelligent ElectricLTD

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Is There Some Growth For Shenzhen Longood Intelligent ElectricLTD?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 22% last year. Still, incredibly EPS has fallen 44% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Comparing that to the market, which is predicted to deliver 41% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

In light of this, it's somewhat alarming that Shenzhen Longood Intelligent ElectricLTD's P/E sits in line with the majority of other companies. It seems most investors are ignoring the recent poor growth rate 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 on the share price eventually.

The Key Takeaway

Shenzhen Longood Intelligent ElectricLTD appears to be back in favour with a solid price jump getting its P/E back in line with 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.

We've established that Shenzhen Longood Intelligent ElectricLTD currently trades on a higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are uncomfortable with the P/E as this earnings performance is unlikely to support a more positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Before you settle on your opinion, we've discovered 3 warning signs for Shenzhen Longood Intelligent ElectricLTD that you should be aware of.

If you're unsure about the strength of Shenzhen Longood Intelligent ElectricLTD'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.