When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 32x, you may consider Zhejiang Dingli Machinery Co.,Ltd (SHSE:603338) as an attractive investment with its 17x 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 limited.
With earnings growth that's superior to most other companies of late, Zhejiang Dingli MachineryLtd has been doing relatively well. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. 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.
How Is Zhejiang Dingli MachineryLtd's Growth Trending?
The only time you'd be truly comfortable seeing a P/E as low as Zhejiang Dingli MachineryLtd's is when the company's growth is on track to lag the market.
If we review the last year of earnings growth, the company posted a terrific increase of 60%. The latest three year period has also seen an excellent 83% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Turning to the outlook, the next year should generate growth of 14% as estimated by the analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 39%, which is noticeably more attractive.
In light of this, it's understandable that Zhejiang Dingli MachineryLtd's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.
The Bottom Line On Zhejiang Dingli MachineryLtd's P/E
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 Zhejiang Dingli MachineryLtd maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. 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 Zhejiang Dingli MachineryLtd that you should be aware of.
Of course, you might also be able to find a better stock than Zhejiang Dingli MachineryLtd. 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.