With a price-to-earnings (or "P/E") ratio of 9.7x Zhejiang Dayuan Pumps Industry Co., Ltd (SHSE:603757) may be sending very bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 27x and even P/E's higher than 48x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Zhejiang Dayuan Pumps Industry has been doing quite well of late. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. 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.

Is There Any Growth For Zhejiang Dayuan Pumps Industry?

Zhejiang Dayuan Pumps Industry's P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

Retrospectively, the last year delivered an exceptional 68% gain to the company's bottom line. Pleasingly, EPS has also lifted 63% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 19% over the next year. Meanwhile, the rest of the market is forecast to expand by 42%, which is noticeably more attractive.

With this information, we can see why Zhejiang Dayuan Pumps Industry 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

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Zhejiang Dayuan Pumps Industry's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

There are also other vital risk factors to consider and we've discovered 2 warning signs for Zhejiang Dayuan Pumps Industry (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

You might be able to find a better investment than Zhejiang Dayuan Pumps Industry. 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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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.