Despite an already strong run, Hunan Oil Pump Co., Ltd. (SHSE:603319) shares have been powering on, with a gain of 36% in the last thirty days. The last 30 days bring the annual gain to a very sharp 51%.

Even after such a large jump in price, Hunan Oil Pump may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 27.4x, since almost half of all companies in China have P/E ratios greater than 37x and even P/E's higher than 73x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

As an illustration, earnings have deteriorated at Hunan Oil Pump over the last year, which is not ideal at all. 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. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

How Is Hunan Oil Pump's Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like Hunan Oil Pump'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 2.4%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 21% overall rise in EPS. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 39% shows it's noticeably less attractive on an annualised basis.

With this information, we can see why Hunan Oil Pump is trading at a P/E lower than the market. 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 Bottom Line On Hunan Oil Pump's P/E

Hunan Oil Pump's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. 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 Hunan Oil Pump 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.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Hunan Oil Pump that you should be aware of.

If you're unsure about the strength of Hunan Oil Pump's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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