Hangzhou AGS MedTech Co., Ltd.'s (SHSE:688581) price-to-earnings (or "P/E") ratio of 22.4x 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 31x and even P/E's above 57x are quite common. 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 HangzhouS MedTech 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 not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
How Is HangzhouS MedTech's Growth Trending?
The only time you'd be truly comfortable seeing a P/E as low as HangzhouS MedTech's is when the company's growth is on track to lag the market.
If we review the last year of earnings growth, the company posted a terrific increase of 25%. Pleasingly, EPS has also lifted 260% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Shifting to the future, estimates from the two analysts covering the company suggest earnings should grow by 9.0% over the next year. Meanwhile, the rest of the market is forecast to expand by 41%, which is noticeably more attractive.
With this information, we can see why HangzhouS MedTech 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.
What We Can Learn From HangzhouS MedTech's P/E?
It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
We've established that HangzhouS MedTech maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.
Before you settle on your opinion, we've discovered 2 warning signs for HangzhouS MedTech that you should be aware of.
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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