There wouldn't be many who think Qingdao Kutesmart Co.,Ltd.'s (SZSE:300840) price-to-earnings (or "P/E") ratio of 24.9x is worth a mention when the median P/E in China is similar at about 28x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

With earnings growth that's superior to most other companies of late, Qingdao KutesmartLtd has been doing relatively well. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. 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.

How Is Qingdao KutesmartLtd's Growth Trending?

In order to justify its P/E ratio, Qingdao KutesmartLtd would need to produce growth that's similar to the market.

Retrospectively, the last year delivered an exceptional 47% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 31% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 37% during the coming year according to the three analysts following the company. Meanwhile, the rest of the market is forecast to expand by 36%, which is not materially different.

With this information, we can see why Qingdao KutesmartLtd is trading at a fairly similar P/E to the market. Apparently shareholders are comfortable to simply hold on while the company is keeping a low profile.

The Final Word

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.

As we suspected, our examination of Qingdao KutesmartLtd's analyst forecasts revealed that its market-matching earnings outlook is contributing to its current P/E. At this stage investors feel the potential for an improvement or deterioration in earnings isn't great enough to justify a high or low P/E ratio. It's hard to see the share price moving strongly in either direction in the near future under these circumstances.

It is also worth noting that we have found 1 warning sign for Qingdao KutesmartLtd that you need to take into consideration.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.