Subdued Growth No Barrier To Kuangda Technology Group Co., Ltd. (SZSE:002516) With Shares Advancing 31%

Simply Wall St · 10/21 22:55

The Kuangda Technology Group Co., Ltd. (SZSE:002516) share price has done very well over the last month, posting an excellent gain of 31%. Unfortunately, despite the strong performance over the last month, the full year gain of 6.5% isn't as attractive.

Since its price has surged higher, Kuangda Technology Group's price-to-earnings (or "P/E") ratio of 38.3x might make it look like a sell right now compared to the market in China, where around half of the companies have P/E ratios below 32x and even P/E's below 19x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Kuangda Technology Group has been doing a good job lately as it's been growing earnings at a solid pace. It might be that many expect the respectable earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders may be a little nervous about the viability of the share price.

Check out our latest analysis for Kuangda Technology Group

pe-multiple-vs-industry
SZSE:002516 Price to Earnings Ratio vs Industry October 21st 2024
Although there are no analyst estimates available for Kuangda Technology Group, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Kuangda Technology Group's Growth Trending?

There's an inherent assumption that a company should outperform the market for P/E ratios like Kuangda Technology Group's to be considered reasonable.

Retrospectively, the last year delivered a decent 7.6% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen an unpleasant 10% overall drop in EPS. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

In contrast to the company, the rest of the market is expected to grow by 37% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we find it concerning that Kuangda Technology Group is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Key Takeaway

Kuangda Technology Group shares have received a push in the right direction, but its P/E is elevated too. 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.

Our examination of Kuangda Technology Group revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Having said that, be aware Kuangda Technology Group is showing 1 warning sign in our investment analysis, you should know about.

If you're unsure about the strength of Kuangda Technology Group's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.