When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 31x, you may consider Zhejiang JIULI Hi-tech Metals Co.,Ltd (SZSE:002318) as a highly attractive investment with its 12.5x 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.
Zhejiang JIULI Hi-tech MetalsLtd 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. 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 Zhejiang JIULI Hi-tech MetalsLtd
Does Growth Match The Low P/E?
There's an inherent assumption that a company should far underperform the market for P/E ratios like Zhejiang JIULI Hi-tech MetalsLtd's to be considered reasonable.
If we review the last year of earnings growth, the company posted a terrific increase of 42%. The latest three year period has also seen an excellent 103% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.
Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 6.6% as estimated by the six analysts watching the company. With the market predicted to deliver 42% growth , that's a disappointing outcome.
In light of this, it's understandable that Zhejiang JIULI Hi-tech MetalsLtd's P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.
What We Can Learn From Zhejiang JIULI Hi-tech MetalsLtd's P/E?
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 Zhejiang JIULI Hi-tech MetalsLtd's analyst forecasts revealed that its outlook for shrinking earnings 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.
There are also other vital risk factors to consider and we've discovered 2 warning signs for Zhejiang JIULI Hi-tech MetalsLtd (1 doesn't sit too well with us!) that you should be aware of before investing here.
If you're unsure about the strength of Zhejiang JIULI Hi-tech MetalsLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.