To the annoyance of some shareholders, Zhuzhou Huarui Precision Cutting Tools Co.,Ltd. (SHSE:688059) shares are down a considerable 29% in the last month, which continues a horrid run for the company. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 53% loss during that time.

Although its price has dipped substantially, Zhuzhou Huarui Precision Cutting ToolsLtd may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 20.4x, since almost half of all companies in China have P/E ratios greater than 28x and even P/E's higher than 50x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Recent times have been pleasing for Zhuzhou Huarui Precision Cutting ToolsLtd 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.

What Are Growth Metrics Telling Us About The Low P/E?

In order to justify its P/E ratio, Zhuzhou Huarui Precision Cutting ToolsLtd would need to produce sluggish growth that's trailing the market.

If we review the last year of earnings growth, the company posted a worthy increase of 11%. The latest three year period has also seen a 26% overall rise in EPS, aided somewhat by its short-term performance. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Shifting to the future, estimates from the seven analysts covering the company suggest earnings should grow by 45% over the next year. Meanwhile, the rest of the market is forecast to expand by 41%, which is not materially different.

With this information, we find it odd that Zhuzhou Huarui Precision Cutting ToolsLtd is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting lower selling prices.

The Key Takeaway

Zhuzhou Huarui Precision Cutting ToolsLtd's recently weak share price has pulled its P/E below most other companies. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Zhuzhou Huarui Precision Cutting ToolsLtd currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. When we see an average earnings outlook with market-like growth, we assume potential risks are what might be placing pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because these conditions should normally provide more support to the share price.

It is also worth noting that we have found 2 warning signs for Zhuzhou Huarui Precision Cutting ToolsLtd (1 shouldn't be ignored!) that you need to take into consideration.

Of course, you might also be able to find a better stock than Zhuzhou Huarui Precision Cutting ToolsLtd. 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.