With a price-to-earnings (or "P/E") ratio of 21.6x Dongguan Aohai Technology Co., Ltd. (SZSE:002993) may be sending bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 28x and even P/E's higher than 52x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

While the market has experienced earnings growth lately, Dongguan Aohai Technology's earnings have gone into reverse gear, which is not great. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Does Growth Match The Low P/E?

Dongguan Aohai Technology's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 9.7%. This means it has also seen a slide in earnings over the longer-term as EPS is down 3.9% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 30% each year as estimated by the two analysts watching the company. With the market only predicted to deliver 24% per annum, the company is positioned for a stronger earnings result.

With this information, we find it odd that Dongguan Aohai Technology is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Bottom Line On Dongguan Aohai Technology's P/E

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Dongguan Aohai Technology'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. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

Before you settle on your opinion, we've discovered 1 warning sign for Dongguan Aohai Technology that you should be aware of.

If these risks are making you reconsider your opinion on Dongguan Aohai Technology, 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.

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