When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 35x, you may consider Zhongjin Gold Corp.,Ltd (SHSE:600489) 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.
Zhongjin GoldLtd certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. 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 not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
Check out our latest analysis for Zhongjin GoldLtd
Does Growth Match The Low P/E?
The only time you'd be truly comfortable seeing a P/E as low as Zhongjin GoldLtd's is when the company's growth is on track to lag the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 45% last year. The strong recent performance means it was also able to grow EPS by 105% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Looking ahead now, EPS is anticipated to climb by 19% during the coming year according to the eight analysts following the company. That's shaping up to be materially lower than the 43% growth forecast for the broader market.
With this information, we can see why Zhongjin GoldLtd 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.
What We Can Learn From Zhongjin GoldLtd's P/E?
We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
As we suspected, our examination of Zhongjin GoldLtd'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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
Before you settle on your opinion, we've discovered 1 warning sign for Zhongjin GoldLtd that you should be aware of.
Of course, you might also be able to find a better stock than Zhongjin GoldLtd. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
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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.