Huizhong Instrumentation Co., Ltd. (SZSE:300371) 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 14% share price drop.
In spite of the heavy fall in price, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 28x, you may still consider Huizhong Instrumentation as an attractive investment with its 19.7x 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.
Huizhong Instrumentation has been struggling lately as its earnings have declined faster than most other companies. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. 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.
Does Growth Match The Low P/E?
Huizhong Instrumentation'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 41% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 26% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
Shifting to the future, estimates from the sole analyst covering the company suggest earnings should grow by 87% over the next year. With the market only predicted to deliver 42%, the company is positioned for a stronger earnings result.
With this information, we find it odd that Huizhong Instrumentation 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 Huizhong Instrumentation's P/E
The softening of Huizhong Instrumentation's shares means its P/E is now sitting at a pretty low level. 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 Huizhong Instrumentation 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. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.
You should always think about risks. Case in point, we've spotted 1 warning sign for Huizhong Instrumentation you should be aware of.
You might be able to find a better investment than Huizhong Instrumentation. 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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