Zhejiang Weixing New Building Materials Co., Ltd.'s (SZSE:002372) price-to-earnings (or "P/E") ratio of 17.2x might 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 28x and even P/E's above 52x 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.
With earnings growth that's superior to most other companies of late, Zhejiang Weixing New Building Materials 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 Zhejiang Weixing New Building Materials?
The only time you'd be truly comfortable seeing a P/E as low as Zhejiang Weixing New Building Materials' is when the company's growth is on track to lag the market.
Retrospectively, the last year delivered a decent 4.9% gain to the company's bottom line. EPS has also lifted 14% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing earnings over that time.
Turning to the outlook, the next three years should generate growth of 6.1% per annum as estimated by the analysts watching the company. With the market predicted to deliver 24% growth per annum, the company is positioned for a weaker earnings result.
In light of this, it's understandable that Zhejiang Weixing New Building Materials' P/E sits below the majority of other companies. 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 Zhejiang Weixing New Building Materials' 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 Zhejiang Weixing New Building Materials 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. It's hard to see the share price rising strongly in the near future under these circumstances.
Having said that, be aware Zhejiang Weixing New Building Materials is showing 1 warning sign in our investment analysis, you should know about.
You might be able to find a better investment than Zhejiang Weixing New Building Materials. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com