When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 29x, you may consider Zhenjiang Dongfang Electric Heating Technology Co.,Ltd (SZSE:300217) as a highly attractive investment with its 8.1x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

Zhenjiang Dongfang Electric Heating TechnologyLtd certainly has been doing a good job lately as it's been growing earnings more than most other companies. 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 Zhenjiang Dongfang Electric Heating TechnologyLtd's Growth Trending?

In order to justify its P/E ratio, Zhenjiang Dongfang Electric Heating TechnologyLtd would need to produce anemic growth that's substantially trailing the market.

If we review the last year of earnings growth, the company posted a terrific increase of 96%. The latest three year period has also seen an excellent 525% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the only analyst covering the company suggest earnings growth is heading into negative territory, declining 21% over the next year. That's not great when the rest of the market is expected to grow by 36%.

In light of this, it's understandable that Zhenjiang Dongfang Electric Heating TechnologyLtd's P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Bottom Line On Zhenjiang Dongfang Electric Heating TechnologyLtd's P/E

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Zhenjiang Dongfang Electric Heating TechnologyLtd's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. 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.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Zhenjiang Dongfang Electric Heating TechnologyLtd (2 make us uncomfortable) you should be aware of.

Of course, you might also be able to find a better stock than Zhenjiang Dongfang Electric Heating TechnologyLtd. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com