Zhejiang Huayou Cobalt Co., Ltd (SHSE:603799) shares have continued their recent momentum with a 28% gain in the last month alone. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 21% in the last twelve months.

In spite of the firm bounce in price, Zhejiang Huayou Cobalt may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 17.1x, since almost half of all companies in China have P/E ratios greater than 30x and even P/E's higher than 58x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Recent times haven't been advantageous for Zhejiang Huayou Cobalt as its earnings have been falling quicker than most other companies. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. You'd much rather the company wasn't bleeding earnings if you still believe in the business. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.

How Is Zhejiang Huayou Cobalt's Growth Trending?

In order to justify its P/E ratio, Zhejiang Huayou Cobalt would need to produce sluggish growth that's trailing the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 27%. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 14% in total. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.

Turning to the outlook, the next three years should generate growth of 18% per year as estimated by the eleven analysts watching the company. That's shaping up to be similar to the 19% per annum growth forecast for the broader market.

With this information, we find it odd that Zhejiang Huayou Cobalt 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.

The Bottom Line On Zhejiang Huayou Cobalt's P/E

Despite Zhejiang Huayou Cobalt's shares building up a head of steam, its P/E still lags most other companies. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Zhejiang Huayou Cobalt currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. There could be some unobserved threats to earnings preventing the P/E ratio from matching the outlook. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

Before you settle on your opinion, we've discovered 3 warning signs for Zhejiang Huayou Cobalt (1 is significant!) that you should be aware of.

Of course, you might also be able to find a better stock than Zhejiang Huayou Cobalt. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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.