Hongli Zhihui Group Co.,Ltd. (SZSE:300219) shareholders that were waiting for something to happen have been dealt a blow with a 26% share price drop in the last month. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 17% share price drop.

Following the heavy fall in price, Hongli Zhihui GroupLtd may be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 19.9x, since almost half of all companies in China have P/E ratios greater than 30x and even P/E's higher than 54x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Earnings have risen firmly for Hongli Zhihui GroupLtd recently, which is pleasing to see. One possibility is that the P/E is low because investors think this respectable earnings growth might actually underperform the broader market in the near future. 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.

See our latest analysis for Hongli Zhihui GroupLtd

How Is Hongli Zhihui GroupLtd's Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like Hongli Zhihui GroupLtd's to be considered reasonable.

If we review the last year of earnings growth, the company posted a worthy increase of 10%. However, due to its less than impressive performance prior to this period, EPS growth is practically non-existent over the last three years overall. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

This is in contrast to the rest of the market, which is expected to grow by 42% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why Hongli Zhihui GroupLtd 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 Key Takeaway

Hongli Zhihui GroupLtd's P/E has taken a tumble along with its share price. 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.

As we suspected, our examination of Hongli Zhihui GroupLtd revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Many other vital risk factors can be found on the company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Hongli Zhihui GroupLtd with six simple checks.

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.