Hangcha Group Co., Ltd's (SHSE:603298) price-to-earnings (or "P/E") ratio of 13.7x might 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 35x and even P/E's above 64x 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, Hangcha Group 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 you 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.
View our latest analysis for Hangcha Group
Does Growth Match The Low P/E?
There's an inherent assumption that a company should far underperform the market for P/E ratios like Hangcha Group's to be considered reasonable.
If we review the last year of earnings growth, the company posted a terrific increase of 62%. The strong recent performance means it was also able to grow EPS by 82% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Looking ahead now, EPS is anticipated to climb by 12% during the coming year according to the seven analysts following the company. With the market predicted to deliver 44% growth , the company is positioned for a weaker earnings result.
With this information, we can see why Hangcha Group 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 Key Takeaway
While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
As we suspected, our examination of Hangcha Group's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.
It is also worth noting that we have found 2 warning signs for Hangcha Group that you need to take into consideration.
Of course, you might also be able to find a better stock than Hangcha Group. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
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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.