When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 29x, you may consider Zhejiang Shuanghuan Driveline Co.,Ltd. (SZSE:002472) as an attractive investment with its 20.1x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's superior to most other companies of late, Zhejiang Shuanghuan DrivelineLtd has been doing relatively well. It might be that many expect the strong earnings performance to degrade substantially, 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.

How Is Zhejiang Shuanghuan DrivelineLtd's Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like Zhejiang Shuanghuan DrivelineLtd's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 32% last year. Pleasingly, EPS has also lifted 423% 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.

Looking ahead now, EPS is anticipated to climb by 18% per year during the coming three years according to the analysts following the company. With the market predicted to deliver 25% growth per year, the company is positioned for a weaker earnings result.

With this information, we can see why Zhejiang Shuanghuan DrivelineLtd 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.

What We Can Learn From Zhejiang Shuanghuan DrivelineLtd'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.

As we suspected, our examination of Zhejiang Shuanghuan DrivelineLtd'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.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for Zhejiang Shuanghuan DrivelineLtd with six simple checks will allow you to discover any risks that could be an issue.

You might be able to find a better investment than Zhejiang Shuanghuan DrivelineLtd. 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.

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