When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 30x, you may consider Zbom Home Collection Co.,Ltd (SHSE:603801) as a highly attractive investment with its 10.9x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.
With earnings growth that's superior to most other companies of late, Zbom Home CollectionLtd 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.
How Is Zbom Home CollectionLtd's Growth Trending?
In order to justify its P/E ratio, Zbom Home CollectionLtd would need to produce anemic growth that's substantially trailing the market.
Retrospectively, the last year delivered a decent 7.6% gain to the company's bottom line. The solid recent performance means it was also able to grow EPS by 23% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been respectable for the company.
Looking ahead now, EPS is anticipated to climb by 11% each year during the coming three years according to the analysts following the company. With the market predicted to deliver 25% growth per year, the company is positioned for a weaker earnings result.
With this information, we can see why Zbom Home CollectionLtd 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 Zbom Home CollectionLtd's P/E?
Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
We've established that Zbom Home CollectionLtd 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.
Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Zbom Home CollectionLtd (1 makes us a bit uncomfortable) you should be aware of.
Of course, you might also be able to find a better stock than Zbom Home CollectionLtd. 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.