When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 30x, you may consider Shenzhen Kedali Industry Co., Ltd. (SZSE:002850) as an attractive investment with its 16.6x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
Recent times have been pleasing for Shenzhen Kedali Industry as its earnings have risen in spite of the market's earnings going into reverse. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
Does Growth Match The Low P/E?
The only time you'd be truly comfortable seeing a P/E as low as Shenzhen Kedali Industry's is when the company's growth is on track to lag the market.
If we review the last year of earnings growth, the company posted a terrific increase of 41%. The latest three year period has also seen an excellent 354% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Looking ahead now, EPS is anticipated to climb by 12% during the coming year according to the twelve analysts following the company. Meanwhile, the rest of the market is forecast to expand by 41%, which is noticeably more attractive.
With this information, we can see why Shenzhen Kedali Industry is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.
What We Can Learn From Shenzhen Kedali Industry's 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.
As we suspected, our examination of Shenzhen Kedali Industry's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
It is also worth noting that we have found 2 warning signs for Shenzhen Kedali Industry (1 is a bit concerning!) that you need to take into consideration.
You might be able to find a better investment than Shenzhen Kedali Industry. 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.