L&K Engineering (Suzhou) Co.,Ltd. (SHSE:603929) shareholders are no doubt pleased to see that the share price has bounced 30% in the last month, although it is still struggling to make up recently lost ground. Notwithstanding the latest gain, the annual share price return of 9.1% isn't as impressive.
Even after such a large jump in price, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 32x, you may still consider L&K Engineering (Suzhou)Ltd as a highly attractive investment with its 15.4x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.
Recent times have been quite advantageous for L&K Engineering (Suzhou)Ltd as its earnings have been rising very briskly. 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.
Does Growth Match The Low P/E?
There's an inherent assumption that a company should far underperform the market for P/E ratios like L&K Engineering (Suzhou)Ltd's to be considered reasonable.
Taking a look back first, we see that the company grew earnings per share by an impressive 89% last year. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.
This is in contrast to the rest of the market, which is expected to grow by 41% over the next year, materially higher than the company's recent medium-term annualised growth rates.
In light of this, it's understandable that L&K Engineering (Suzhou)Ltd's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.
The Bottom Line On L&K Engineering (Suzhou)Ltd's P/E
Shares in L&K Engineering (Suzhou)Ltd 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 L&K Engineering (Suzhou)Ltd maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless the recent medium-term 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 1 warning sign for L&K Engineering (Suzhou)Ltd that you need to take into consideration.
You might be able to find a better investment than L&K Engineering (Suzhou)Ltd. 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.