When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 31x, you may consider Hangzhou Hikvision Digital Technology Co., Ltd. (SZSE:002415) as an attractive investment with its 21.1x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.
Hangzhou Hikvision Digital Technology certainly has been doing a good job lately as it's been growing earnings more than most other companies. 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.
Does Growth Match The Low P/E?
There's an inherent assumption that a company should underperform the market for P/E ratios like Hangzhou Hikvision Digital Technology's to be considered reasonable.
If we review the last year of earnings growth, the company posted a worthy increase of 11%. Still, EPS has barely risen at all in aggregate from three years ago, which is not ideal. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.
Looking ahead now, EPS is anticipated to climb by 21% per annum during the coming three years according to the analysts following the company. That's shaping up to be similar to the 20% per annum growth forecast for the broader market.
In light of this, it's peculiar that Hangzhou Hikvision Digital Technology's P/E sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting lower selling prices.
The Bottom Line On Hangzhou Hikvision Digital Technology'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.
We've established that Hangzhou Hikvision Digital Technology currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. There could be some unobserved threats to earnings preventing the P/E ratio from matching the outlook. It appears some are indeed anticipating earnings instability, because these conditions should normally provide more support to the share price.
It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Hangzhou Hikvision Digital Technology, and understanding should be part of your investment process.
Of course, you might also be able to find a better stock than Hangzhou Hikvision Digital Technology. 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.