Himile Mechanical Science and Technology (Shandong) Co., Ltd's (SZSE:002595) price-to-earnings (or "P/E") ratio of 17.3x 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. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Himile Mechanical Science and Technology (Shandong) 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.

Does Growth Match The Low P/E?

In order to justify its P/E ratio, Himile Mechanical Science and Technology (Shandong) 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 34% last year. The strong recent performance means it was also able to grow EPS by 62% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 10% each year as estimated by the four 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 Himile Mechanical Science and Technology (Shandong)'s 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.

The Bottom Line On Himile Mechanical Science and Technology (Shandong)'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 Himile Mechanical Science and Technology (Shandong) 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.

It is also worth noting that we have found 1 warning sign for Himile Mechanical Science and Technology (Shandong) that you need to take into consideration.

If these risks are making you reconsider your opinion on Himile Mechanical Science and Technology (Shandong), explore our interactive list of high quality stocks to get an idea of what else is out there.

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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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