The Hangcha Group Co., Ltd (SHSE:603298) share price has done very well over the last month, posting an excellent gain of 33%. Looking back a bit further, it's encouraging to see the stock is up 43% in the last year.

Although its price has surged higher, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 29x, you may still consider Hangcha Group as an attractive investment with its 18x 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 Hangcha Group 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 Hangcha Group's Growth Trending?

In order to justify its P/E ratio, Hangcha Group would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered an exceptional 62% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 82% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next year should generate growth of 16% as estimated by the seven analysts watching the company. That's shaping up to be materially lower than the 41% growth forecast for the broader market.

In light of this, it's understandable that Hangcha Group's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Final Word

Hangcha Group's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Hangcha Group's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. 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.

You always need to take note of risks, for example - Hangcha Group has 2 warning signs we think you should be aware of.

Of course, you might also be able to find a better stock than Hangcha Group. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.