When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 36x, you may consider Hengdian Group DMEGC Magnetics Co. ,Ltd (SZSE:002056) as a highly attractive investment with its 10.3x 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 Hengdian Group DMEGC Magnetics Ltd 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 Hengdian Group DMEGC Magnetics Ltd
How Is Hengdian Group DMEGC Magnetics Ltd's Growth Trending?
There's an inherent assumption that a company should far underperform the market for P/E ratios like Hengdian Group DMEGC Magnetics Ltd's to be considered reasonable.
Taking a look back first, we see that the company grew earnings per share by an impressive 45% last year. Pleasingly, EPS has also lifted 149% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 21% over the next year. Meanwhile, the rest of the market is forecast to expand by 43%, which is noticeably more attractive.
With this information, we can see why Hengdian Group DMEGC Magnetics Ltd is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.
The Final Word
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 Hengdian Group DMEGC Magnetics Ltd'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.
And what about other risks? Every company has them, and we've spotted 1 warning sign for Hengdian Group DMEGC Magnetics Ltd you should know about.
You might be able to find a better investment than Hengdian Group DMEGC Magnetics Ltd. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).
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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.