Shenzhen Longood Intelligent Electric Co.,LTD's (SZSE:300543) Shares Climb 46% But Its Business Is Yet to Catch Up

Shenzhen Longood Intelligent Electric Co.,LTD (SZSE:300543) shareholders have had their patience rewarded with a 46% share price jump in the last month. Unfortunately, despite the strong performance over the last month, the full year gain of 6.4% isn't as attractive.

Since its price has surged higher, Shenzhen Longood Intelligent ElectricLTD may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 72.4x, since almost half of all companies in China have P/E ratios under 33x and even P/E's lower than 20x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

For example, consider that Shenzhen Longood Intelligent ElectricLTD's financial performance has been poor lately as its earnings have been in decline. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Shenzhen Longood Intelligent ElectricLTD

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Shenzhen Longood Intelligent ElectricLTD will help you shine a light on its historical performance.

How Is Shenzhen Longood Intelligent ElectricLTD's Growth Trending?

In order to justify its P/E ratio, Shenzhen Longood Intelligent ElectricLTD would need to produce outstanding growth well in excess of the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 40%. This means it has also seen a slide in earnings over the longer-term as EPS is down 78% in total over the last three years. 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 37% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

With this information, we find it concerning that Shenzhen Longood Intelligent ElectricLTD is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Final Word

Shares in Shenzhen Longood Intelligent ElectricLTD have built up some good momentum lately, which has really inflated its P/E. 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 Shenzhen Longood Intelligent ElectricLTD revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Plus, you should also learn about these 3 warning signs we've spotted with Shenzhen Longood Intelligent ElectricLTD (including 1 which doesn't sit too well with us).

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.