With a price-to-earnings (or "P/E") ratio of 21.1x Yunnan Chihong Zinc & Germanium Co., Ltd. (SHSE:600497) may be sending bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 30x and even P/E's higher than 56x 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.
Yunnan Chihong Zinc & Germanium certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to degrade substantially, 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 Yunnan Chihong Zinc & Germanium?
In order to justify its P/E ratio, Yunnan Chihong Zinc & Germanium would need to produce sluggish growth that's trailing the market.
If we review the last year of earnings growth, the company posted a terrific increase of 71%. The strong recent performance means it was also able to grow EPS by 94% 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 three years should generate growth of 23% per annum as estimated by the six analysts watching the company. That's shaping up to be similar to the 25% each year growth forecast for the broader market.
With this information, we find it odd that Yunnan Chihong Zinc & Germanium is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting lower selling prices.
What We Can Learn From Yunnan Chihong Zinc & Germanium's P/E?
While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
We've established that Yunnan Chihong Zinc & Germanium currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. When we see an average earnings outlook with market-like growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.
Plus, you should also learn about this 1 warning sign we've spotted with Yunnan Chihong Zinc & Germanium.
Of course, you might also be able to find a better stock than Yunnan Chihong Zinc & Germanium. 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.
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