With a price-to-earnings (or "P/E") ratio of 20x Huali Industrial Group Company Limited (SZSE:300979) may be sending bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 36x and even P/E's higher than 65x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.
With earnings that are retreating more than the market's of late, Huali Industrial Group has been very sluggish. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.
Check out our latest analysis for Huali Industrial Group
Is There Any Growth For Huali Industrial Group?
Huali Industrial Group'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.
Retrospectively, the last year delivered a frustrating 4.6% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 64% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.
Turning to the outlook, the next year should generate growth of 17% as estimated by the eleven analysts watching the company. With the market predicted to deliver 44% growth , the company is positioned for a weaker earnings result.
With this information, we can see why Huali Industrial Group 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.
The Bottom Line On Huali Industrial Group's P/E
Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
We've established that Huali Industrial Group 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.
It is also worth noting that we have found 1 warning sign for Huali Industrial Group that you need to take into consideration.
You might be able to find a better investment than Huali Industrial Group. 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.
