When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 30x, you may consider Zhuzhou Hongda Electronics Corp.,Ltd. (SZSE:300726) as an attractive investment with its 25.1x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Zhuzhou Hongda ElectronicsLtd could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Is There Any Growth For Zhuzhou Hongda ElectronicsLtd?

The only time you'd be truly comfortable seeing a P/E as low as Zhuzhou Hongda ElectronicsLtd's is when the company's growth is on track to lag the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 51%. The last three years don't look nice either as the company has shrunk EPS by 36% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the sole analyst covering the company suggest earnings should grow by 204% over the next year. With the market only predicted to deliver 36%, the company is positioned for a stronger earnings result.

In light of this, it's peculiar that Zhuzhou Hongda ElectronicsLtd's P/E sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Bottom Line On Zhuzhou Hongda ElectronicsLtd's P/E

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Zhuzhou Hongda ElectronicsLtd currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. 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 take the next step, you should know about the 2 warning signs for Zhuzhou Hongda ElectronicsLtd that we have uncovered.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com