When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 36x, you may consider Zoomlion Heavy Industry Science and Technology Co., Ltd. (SZSE:000157) as an attractive investment with its 18x P/E ratio. 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, Zoomlion Heavy Industry Science and Technology 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 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 Zoomlion Heavy Industry Science and Technology
What Are Growth Metrics Telling Us About The Low P/E?
In order to justify its P/E ratio, Zoomlion Heavy Industry Science and Technology would need to produce sluggish growth that's trailing the market.
Retrospectively, the last year delivered a decent 15% gain to the company's bottom line. Still, lamentably EPS has fallen 60% in aggregate from three years ago, which is disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 39% over the next year. Meanwhile, the rest of the market is forecast to expand by 43%, which is not materially different.
With this information, we find it odd that Zoomlion Heavy Industry Science and Technology 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
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 Zoomlion Heavy Industry Science and Technology'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.
There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Zoomlion Heavy Industry Science and Technology that you should be aware of.
If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
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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.