Zhejiang Sanfer Electric Co., Ltd (SHSE:605336) shares have continued their recent momentum with a 26% gain in the last month alone. Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.

Even after such a large jump in price, Zhejiang Sanfer Electric may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 29.2x, since almost half of all companies in China have P/E ratios greater than 38x and even P/E's higher than 74x are not unusual. However, the P/E might be 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 Sanfer Electric has been very sluggish. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.

How Is Zhejiang Sanfer Electric's Growth Trending?

In order to justify its P/E ratio, Zhejiang Sanfer Electric would need to produce sluggish growth that's trailing the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 53%. The last three years don't look nice either as the company has shrunk EPS by 63% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 122% as estimated by the one analyst watching the company. That's shaping up to be materially higher than the 38% growth forecast for the broader market.

In light of this, it's peculiar that Zhejiang Sanfer Electric's P/E sits below the majority of other companies. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

The Final Word

The latest share price surge wasn't enough to lift Zhejiang Sanfer Electric's P/E close to the market median. 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 Zhejiang Sanfer Electric's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

Having said that, be aware Zhejiang Sanfer Electric is showing 2 warning signs in our investment analysis, and 1 of those is significant.

If these risks are making you reconsider your opinion on Zhejiang Sanfer Electric, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.