Fujian Zitian Media Technology Co., Ltd. (SZSE:300280) shares have continued their recent momentum with a 30% gain in the last month alone. The last month tops off a massive increase of 198% in the last year.
Even after such a large jump in price, Fujian Zitian Media Technology's price-to-earnings (or "P/E") ratio of 29x might still make it look like a buy right now compared to the market in China, where around half of the companies have P/E ratios above 35x and even P/E's above 65x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
Recent times have been quite advantageous for Fujian Zitian Media Technology as its earnings have been rising very briskly. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
Check out our latest analysis for Fujian Zitian Media Technology
What Are Growth Metrics Telling Us About The Low P/E?
There's an inherent assumption that a company should underperform the market for P/E ratios like Fujian Zitian Media Technology's to be considered reasonable.
If we review the last year of earnings growth, the company posted a terrific increase of 227%. EPS has also lifted 7.0% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been respectable for the company.
This is in contrast to the rest of the market, which is expected to grow by 44% over the next year, materially higher than the company's recent medium-term annualised growth rates.
With this information, we can see why Fujian Zitian Media Technology 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 Fujian Zitian Media Technology's P/E
Fujian Zitian Media Technology's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
As we suspected, our examination of Fujian Zitian Media Technology revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.
It is also worth noting that we have found 2 warning signs for Fujian Zitian Media Technology that you need to take into consideration.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.