When close to half the companies in China have price-to-earnings ratios (P/E’s) above 29x, Suzhou Hengmingda Electronic Technology Co., Ltd. (SZSE:002947) stands out with its attractive 22.5x P/E ratio. However, this seemingly low P/E ratio warrants further investigation. Let’s explore why.
The Earnings Surge
Recent times have been favorable for Suzhou Hengmingda Electronic Technology, as its earnings have risen briskly. The strong performance suggests that the P/E might be low because investors anticipate this robust earnings growth to underperform the broader market in the near future. If you’re interested in the company, you’d hope this isn’t the case, allowing you to potentially acquire stock while it’s undervalued.
Growth Metrics Unveiled
Suzhou Hengmingda Electronic Technology’s last year delivered an exceptional 47% gain to its bottom line. Over the last three years, it achieved an impressive 196% growth in earnings per share (EPS). Shareholders would likely welcome such medium-term rates of earnings growth. In contrast, the broader market is expected to grow by only 36% over the next year, significantly lower than the company’s recent medium-term annualized growth rates. Curiously, Suzhou Hengmingda Electronic Technology’s P/E ratio sits below that of most other companies, indicating that some shareholders believe its recent performance has exceeded expectations and are willing to accept lower selling prices.
While the P/E ratio shouldn’t be the sole factor in your investment decision, it serves as a valuable barometer of earnings expectations. Suzhou Hengmingda Electronic Technology currently trades at a much lower P/E than expected due to its impressive three-year growth outpacing the wider market forecast. Keep in mind that unobserved threats to earnings could prevent the P/E ratio from fully reflecting this positive performance. As long as recent medium-term earnings trends continue, price risks appear minimal, but investors anticipate potential earnings volatility in the future.
