With a price-to-earnings (or "P/E") ratio of 17x Zhejiang JIULI Hi-tech Metals Co.,Ltd (SZSE:002318) may be sending very bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 37x and even P/E's higher than 73x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

With earnings that are retreating more than the market's of late, Zhejiang JIULI Hi-tech MetalsLtd has been very sluggish. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. You'd much rather the company wasn't bleeding earnings if you still believe in the business. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.

Is There Any Growth For Zhejiang JIULI Hi-tech MetalsLtd?

Zhejiang JIULI Hi-tech MetalsLtd's P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 5.9%. Still, the latest three year period has seen an excellent 66% overall rise in EPS, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 12% during the coming year according to the six analysts following the company. That's shaping up to be materially lower than the 38% growth forecast for the broader market.

With this information, we can see why Zhejiang JIULI Hi-tech MetalsLtd 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.

The Final Word

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Zhejiang JIULI Hi-tech MetalsLtd's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Before you take the next step, you should know about the 1 warning sign for Zhejiang JIULI Hi-tech MetalsLtd that we have uncovered.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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