Hang Zhou Radical Energy-Saving Technology Co., Ltd. (SZSE:300652) shares have had a horrible month, losing 28% after a relatively good period beforehand. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 25% share price drop.

In spite of the heavy fall in price, Hang Zhou Radical Energy-Saving Technology may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 18.9x, since almost half of all companies in China have P/E ratios greater than 30x and even P/E's higher than 54x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

For instance, Hang Zhou Radical Energy-Saving Technology's receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. 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 Hang Zhou Radical Energy-Saving Technology

Is There Any Growth For Hang Zhou Radical Energy-Saving Technology?

There's an inherent assumption that a company should underperform the market for P/E ratios like Hang Zhou Radical Energy-Saving Technology's to be considered reasonable.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 20%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 66% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 42% shows it's noticeably less attractive on an annualised basis.

In light of this, it's understandable that Hang Zhou Radical Energy-Saving Technology's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

The Key Takeaway

The softening of Hang Zhou Radical Energy-Saving Technology's shares means its P/E is now sitting at a pretty low level. 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 Hang Zhou Radical Energy-Saving Technology revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Plus, you should also learn about this 1 warning sign we've spotted with Hang Zhou Radical Energy-Saving Technology.

You might be able to find a better investment than Hang Zhou Radical Energy-Saving Technology. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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