Zhejiang Entive Smart Kitchen Appliance Co., Ltd. (SZSE:300911) shareholders that were waiting for something to happen have been dealt a blow with a 26% share price drop in the last month. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 45% share price drop.

Even after such a large drop in price, Zhejiang Entive Smart Kitchen Appliance's price-to-earnings (or "P/E") ratio of 13.3x might still make it look like a strong buy right now compared to the market in China, where around half of the companies have P/E ratios above 30x and even P/E's above 54x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Zhejiang Entive Smart Kitchen Appliance has been doing quite well of late. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for Zhejiang Entive Smart Kitchen Appliance

Does Growth Match The Low P/E?

In order to justify its P/E ratio, Zhejiang Entive Smart Kitchen Appliance would need to produce anemic growth that's substantially trailing the market.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 3.5% last year. The latest three year period has also seen a 22% overall rise in EPS, aided somewhat by its short-term performance. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 15% during the coming year according to the nine analysts following the company. That's shaping up to be materially lower than the 42% growth forecast for the broader market.

With this information, we can see why Zhejiang Entive Smart Kitchen Appliance is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Final Word

Shares in Zhejiang Entive Smart Kitchen Appliance have plummeted and its P/E is now low enough to touch the ground. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Zhejiang Entive Smart Kitchen Appliance maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. 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.

There are also other vital risk factors to consider and we've discovered 2 warning signs for Zhejiang Entive Smart Kitchen Appliance (1 doesn't sit too well with us!) that you should be aware of before investing here.

Of course, you might also be able to find a better stock than Zhejiang Entive Smart Kitchen Appliance. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.