Wuxi Hongsheng Heat Exchanger Manufacturing Co., Ltd. (SHSE:603090) shareholders won't be pleased to see that the share price has had a very rough month, dropping 29% and undoing the prior period's positive performance. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 42% share price drop.
In spite of the heavy fall in price, Wuxi Hongsheng Heat Exchanger Manufacturing may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 27.3x, since almost half of all companies in China have P/E ratios greater than 32x and even P/E's higher than 58x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
With earnings growth that's exceedingly strong of late, Wuxi Hongsheng Heat Exchanger Manufacturing has been doing very well. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. 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.
See our latest analysis for Wuxi Hongsheng Heat Exchanger Manufacturing
How Is Wuxi Hongsheng Heat Exchanger Manufacturing's Growth Trending?
There's an inherent assumption that a company should underperform the market for P/E ratios like Wuxi Hongsheng Heat Exchanger Manufacturing's to be considered reasonable.
Retrospectively, the last year delivered an exceptional 83% gain to the company's bottom line. Pleasingly, EPS has also lifted 221% 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.
Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 43% shows it's noticeably more attractive on an annualised basis.
With this information, we find it odd that Wuxi Hongsheng Heat Exchanger Manufacturing is trading at a P/E lower than the market. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.
The Final Word
Wuxi Hongsheng Heat Exchanger Manufacturing's recently weak share price has pulled its P/E below most other companies. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
We've established that Wuxi Hongsheng Heat Exchanger Manufacturing currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.
Plus, you should also learn about these 2 warning signs we've spotted with Wuxi Hongsheng Heat Exchanger Manufacturing.
Of course, you might also be able to find a better stock than Wuxi Hongsheng Heat Exchanger Manufacturing. 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.