With a price-to-earnings (or "P/E") ratio of 26.5x Huaming Power Equipment Co.,Ltd (SZSE:002270) may be sending bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 36x and even P/E's higher than 70x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
With its earnings growth in positive territory compared to the declining earnings of most other companies, Huaming Power EquipmentLtd has been doing quite well of late. 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 not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
How Is Huaming Power EquipmentLtd's Growth Trending?
Huaming Power EquipmentLtd's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.
If we review the last year of earnings growth, the company posted a worthy increase of 8.6%. The latest three year period has also seen a 18% overall rise in EPS, aided somewhat by its short-term performance. Therefore, it's fair to say the earnings growth recently has been respectable for the company.
Shifting to the future, estimates from the eleven analysts covering the company suggest earnings should grow by 24% over the next year. With the market predicted to deliver 38% growth , the company is positioned for a weaker earnings result.
With this information, we can see why Huaming Power EquipmentLtd is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.
The Final Word
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.
We've established that Huaming Power EquipmentLtd 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.
And what about other risks? Every company has them, and we've spotted 1 warning sign for Huaming Power EquipmentLtd you should know about.
It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).
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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.
