Zhejiang Xiantong Rubber&Plastic Co.,Ltd's (SHSE:603239) price-to-earnings (or "P/E") ratio of 20.5x 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 36x and even P/E's above 70x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Zhejiang Xiantong Rubber&PlasticLtd certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. 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 Zhejiang Xiantong Rubber&PlasticLtd's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as low as Zhejiang Xiantong Rubber&PlasticLtd's is when the company's growth is on track to lag the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 39% last year. The latest three year period has also seen an excellent 30% overall rise in EPS, aided by its short-term performance. 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 year should generate growth of 66% as estimated by the one analyst watching the company. With the market only predicted to deliver 39%, the company is positioned for a stronger earnings result.

In light of this, it's peculiar that Zhejiang Xiantong Rubber&PlasticLtd's P/E sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Key Takeaway

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Zhejiang Xiantong Rubber&PlasticLtd's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

Before you settle on your opinion, we've discovered 1 warning sign for Zhejiang Xiantong Rubber&PlasticLtd that you should be aware of.

Of course, you might also be able to find a better stock than Zhejiang Xiantong Rubber&PlasticLtd. 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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