The Zhejiang Cfmoto Power Co.,Ltd (SHSE:603129) share price has done very well over the last month, posting an excellent gain of 32%. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 20% over that time.
Even after such a large jump in price, Zhejiang Cfmoto PowerLtd's price-to-earnings (or "P/E") ratio of 18.2x might still 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 56x 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 Zhejiang Cfmoto PowerLtd as its earnings have risen in spite of the market's earnings going into reverse. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
Is There Any Growth For Zhejiang Cfmoto PowerLtd?
There's an inherent assumption that a company should underperform the market for P/E ratios like Zhejiang Cfmoto PowerLtd's to be considered reasonable.
Taking a look back first, we see that the company grew earnings per share by an impressive 41% last year. The strong recent performance means it was also able to grow EPS by 139% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Shifting to the future, estimates from the nine analysts covering the company suggest earnings should grow by 30% over the next year. With the market predicted to deliver 41% growth , the company is positioned for a weaker earnings result.
In light of this, it's understandable that Zhejiang Cfmoto PowerLtd'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 Key Takeaway
Zhejiang Cfmoto PowerLtd's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. 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 Zhejiang Cfmoto PowerLtd maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
You always need to take note of risks, for example - Zhejiang Cfmoto PowerLtd has 1 warning sign we think you should be aware of.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.
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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.