With a price-to-earnings (or "P/E") ratio of 11.3x Hangzhou Huawang New Material Technology Co.,Ltd. (SHSE:605377) may be sending very bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 31x and even P/E's higher than 56x are not unusual. However, the P/E might be quite 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, Hangzhou Huawang New Material TechnologyLtd 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 not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Hangzhou Huawang New Material TechnologyLtd

How Is Hangzhou Huawang New Material TechnologyLtd's Growth Trending?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Hangzhou Huawang New Material TechnologyLtd's to be considered reasonable.

If we review the last year of earnings growth, the company posted a worthy increase of 8.3%. The latest three year period has also seen an excellent 49% overall rise in EPS, aided somewhat by its short-term performance. 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 22% during the coming year according to the six analysts following the company. Meanwhile, the rest of the market is forecast to expand by 42%, which is noticeably more attractive.

In light of this, it's understandable that Hangzhou Huawang New Material TechnologyLtd'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

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.

We've established that Hangzhou Huawang New Material TechnologyLtd maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. 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 take the next step, you should know about the 2 warning signs for Hangzhou Huawang New Material TechnologyLtd (1 is concerning!) that we have uncovered.

Of course, you might also be able to find a better stock than Hangzhou Huawang New Material TechnologyLtd. 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.