When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 34x, you may consider Zhejiang Dahua Technology Co., Ltd. (SZSE:002236) as an attractive investment with its 17.3x 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.
Recent times have been pleasing for Zhejiang Dahua Technology as its earnings have risen in spite of the market's earnings going into reverse. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. 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.
View our latest analysis for Zhejiang Dahua Technology
How Is Zhejiang Dahua Technology's Growth Trending?
In order to justify its P/E ratio, Zhejiang Dahua Technology would need to produce sluggish growth that's trailing the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 15% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 31% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
Turning to the outlook, the next year should generate growth of 50% as estimated by the analysts watching the company. With the market only predicted to deliver 43%, the company is positioned for a stronger earnings result.
With this information, we find it odd that Zhejiang Dahua Technology is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.
The Bottom Line On Zhejiang Dahua Technology's P/E
While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
Our examination of Zhejiang Dahua Technology's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. 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. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.
There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Zhejiang Dahua Technology that you should be aware of.
You might be able to find a better investment than Zhejiang Dahua Technology. 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.