Those holding Hang Zhou Radical Energy-Saving Technology Co., Ltd. (SZSE:300652) shares would be relieved that the share price has rebounded 32% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 7.0% over the last year.
Even after such a large jump in price, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 32x, you may still consider Hang Zhou Radical Energy-Saving Technology as an attractive investment with its 20.2x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.
For instance, Hang Zhou Radical Energy-Saving Technology's receding earnings in recent times would have to be some food for thought. It might be that many expect the disappointing earnings performance to continue or accelerate, 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.
What Are Growth Metrics Telling Us About The Low P/E?
In order to justify its P/E ratio, Hang Zhou Radical Energy-Saving Technology would need to produce sluggish growth that's trailing the market.
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. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.
This is in contrast to the rest of the market, which is expected to grow by 41% over the next year, materially higher than the company's recent medium-term annualised growth rates.
In light of this, it's understandable that Hang Zhou Radical Energy-Saving Technology's P/E sits below the majority of other companies. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.
The Key Takeaway
Hang Zhou Radical Energy-Saving Technology's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
We've established that Hang Zhou Radical Energy-Saving Technology maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, 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. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.
And what about other risks? Every company has them, and we've spotted 2 warning signs for Hang Zhou Radical Energy-Saving Technology you should know about.
If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
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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.