When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 35x, you may consider Zhejiang Jingsheng Mechanical & Electrical Co., Ltd. (SZSE:300316) as a highly attractive investment with its 12.3x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.
With its earnings growth in positive territory compared to the declining earnings of most other companies, Zhejiang Jingsheng Mechanical & Electrical has been doing quite well of late. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. 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.
View our latest analysis for Zhejiang Jingsheng Mechanical & Electrical
Does Growth Match The Low P/E?
In order to justify its P/E ratio, Zhejiang Jingsheng Mechanical & Electrical would need to produce anemic growth that's substantially trailing the market.
If we review the last year of earnings growth, the company posted a terrific increase of 67%. The strong recent performance means it was also able to grow EPS by 528% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Turning to the outlook, the next year should generate growth of 25% as estimated by the analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 44%, which is noticeably more attractive.
In light of this, it's understandable that Zhejiang Jingsheng Mechanical & Electrical's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.
The Final Word
Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
As we suspected, our examination of Zhejiang Jingsheng Mechanical & Electrical's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.
Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Zhejiang Jingsheng Mechanical & Electrical (1 is a bit unpleasant) you should be aware of.
If you're unsure about the strength of Zhejiang Jingsheng Mechanical & Electrical's 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.