When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 35x, you may consider Hangzhou Robam Appliances Co., Ltd. (SZSE:002508) as a highly attractive investment with its 11.6x 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.
Recent times have been pleasing for Hangzhou Robam Appliances as its earnings have risen in spite of the market's earnings going into reverse. 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.
See our latest analysis for Hangzhou Robam Appliances
Does Growth Match The Low P/E?
There's an inherent assumption that a company should far underperform the market for P/E ratios like Hangzhou Robam Appliances' to be considered reasonable.
Retrospectively, the last year delivered an exceptional 41% gain to the company's bottom line. As a result, it also grew EPS by 5.4% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing earnings over that time.
Looking ahead now, EPS is anticipated to climb by 17% during the coming year according to the analysts following the company. With the market predicted to deliver 44% growth , the company is positioned for a weaker earnings result.
With this information, we can see why Hangzhou Robam Appliances 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 Key Takeaway
Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
As we suspected, our examination of Hangzhou Robam Appliances' analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. 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 Hangzhou Robam Appliances you should know about.
If you're unsure about the strength of Hangzhou Robam Appliances' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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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.