When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 35x, you may consider Ningbo Haitian Precision Machinery Co.,Ltd. (SHSE:601882) as an attractive investment with its 20.8x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.
With its earnings growth in positive territory compared to the declining earnings of most other companies, Ningbo Haitian Precision MachineryLtd has been doing quite well of late. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, 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.
Check out our latest analysis for Ningbo Haitian Precision MachineryLtd
Does Growth Match The Low P/E?
Ningbo Haitian Precision MachineryLtd's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 20% last year. The latest three year period has also seen an excellent 408% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Turning to the outlook, the next year should generate growth of 25% as estimated by the seven analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 44%, which is noticeably more attractive.
With this information, we can see why Ningbo Haitian Precision MachineryLtd 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 Ningbo Haitian Precision MachineryLtd's P/E?
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.
We've established that Ningbo Haitian Precision MachineryLtd maintains its low P/E on the weakness of its forecast growth being lower than the wider market, 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
Having said that, be aware Ningbo Haitian Precision MachineryLtd is showing 2 warning signs in our investment analysis, and 1 of those is potentially serious.
If you're unsure about the strength of Ningbo Haitian Precision MachineryLtd'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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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.
