With a price-to-earnings (or "P/E") ratio of 17.8x Hangzhou Greatstar Industrial Co., Ltd (SZSE:002444) may be sending bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 31x and even P/E's higher than 57x 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.
With earnings growth that's superior to most other companies of late, Hangzhou Greatstar Industrial has been doing relatively well. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. 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.
Is There Any Growth For Hangzhou Greatstar Industrial?
In order to justify its P/E ratio, Hangzhou Greatstar Industrial would need to produce sluggish growth that's trailing the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 15% last year. As a result, it also grew EPS by 17% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing earnings over that time.
Shifting to the future, estimates from the eleven analysts covering the company suggest earnings should grow by 14% over the next year. That's shaping up to be materially lower than the 39% growth forecast for the broader market.
With this information, we can see why Hangzhou Greatstar Industrial 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 Hangzhou Greatstar Industrial's P/E?
Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
As we suspected, our examination of Hangzhou Greatstar Industrial'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.
It is also worth noting that we have found 1 warning sign for Hangzhou Greatstar Industrial that you need to take into consideration.
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.