Shenzhen H&T Intelligent Control Co.Ltd's (SZSE:002402) price-to-earnings (or "P/E") ratio of 30.1x might 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 64x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
Shenzhen H&T Intelligent ControlLtd's negative earnings growth of late has neither been better nor worse than most other companies. It might be that many expect the company's earnings performance to degrade further, 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. At the very least, you'd be hoping that earnings don't fall off a cliff if your plan is to pick up some stock while it's out of favour.
See our latest analysis for Shenzhen H&T Intelligent ControlLtd
Is There Any Growth For Shenzhen H&T Intelligent ControlLtd?
There's an inherent assumption that a company should underperform the market for P/E ratios like Shenzhen H&T Intelligent ControlLtd's to be considered reasonable.
Retrospectively, the last year delivered a frustrating 2.8% decrease to the company's bottom line. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 24% in total. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.
Looking ahead now, EPS is anticipated to climb by 64% during the coming year according to the eight analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 43%, which is noticeably less attractive.
In light of this, it's peculiar that Shenzhen H&T Intelligent ControlLtd's P/E sits below the majority of other companies. It looks like most investors are not convinced at all that the company can achieve future growth expectations.
What We Can Learn From Shenzhen H&T Intelligent ControlLtd's P/E?
Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
We've established that Shenzhen H&T Intelligent ControlLtd currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.
You need to take note of risks, for example - Shenzhen H&T Intelligent ControlLtd has 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.
If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
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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.