China Harmony Auto Holding Limited's (HKG:3836) price-to-earnings (or "P/E") ratio of 5.3x might make it look like a buy right now compared to the market in Hong Kong, where around half of the companies have P/E ratios above 9x and even P/E's above 20x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

China Harmony Auto Holding 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 not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for China Harmony Auto Holding

Is There Any Growth For China Harmony Auto Holding?

The only time you'd be truly comfortable seeing a P/E as low as China Harmony Auto Holding's is when the company's growth is on track to lag the market.

Retrospectively, the last year delivered an exceptional 64% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 2.4% drop in EPS in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to climb by 14% per year during the coming three years according to the six analysts following the company. With the market predicted to deliver 15% growth per year, the company is positioned for a comparable earnings result.

With this information, we find it odd that China Harmony Auto Holding is trading at a P/E lower than the market. It may be that most investors are not convinced the company can achieve future growth expectations.

The Key Takeaway

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.

Our examination of China Harmony Auto Holding's analyst forecasts revealed that its market-matching earnings outlook isn't contributing to its P/E as much as we would have predicted. There could be some unobserved threats to earnings preventing the P/E ratio from matching the outlook. It appears some are indeed anticipating earnings instability, because these conditions should normally provide more support to the share price.

Having said that, be aware China Harmony Auto Holding is showing 1 warning sign in our investment analysis, you should know about.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a P/E below 20x.

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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.