Shenglong Splendecor International Limited (HKG:8481) Stock Rockets 38% But Many Are Still Ignoring The Company

Despite an already strong run, Shenglong Splendecor International Limited (HKG:8481) shares have been powering on, with a gain of 38% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 25% in the last year.

Although its price has surged higher, Shenglong Splendecor International's price-to-earnings (or "P/E") ratio of 5.1x might still make it look like a strong buy right now compared to the market in Hong Kong, where around half of the companies have P/E ratios above 12x and even P/E's above 25x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

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Shenglong Splendecor International certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for Shenglong Splendecor International

Although there are no analyst estimates available for Shenglong Splendecor International, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Any Growth For Shenglong Splendecor International?

The only time you'd be truly comfortable seeing a P/E as depressed as Shenglong Splendecor International's is when the company's growth is on track to lag the market decidedly.

If we review the last year of earnings growth, the company posted a terrific increase of 74%. The latest three year period has also seen an excellent 309% 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.

This is in contrast to the rest of the market, which is expected to grow by 19% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's peculiar that Shenglong Splendecor International's P/E sits below the majority of other companies. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Bottom Line On Shenglong Splendecor International's P/E

Shares in Shenglong Splendecor International are going to need a lot more upward momentum to get the company's P/E out of its slump. 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.

We've established that Shenglong Splendecor International currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.

You need to take note of risks, for example - Shenglong Splendecor International has 5 warning signs (and 3 which can't be ignored) we think you should know about.

You might be able to find a better investment than Shenglong Splendecor International. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.