When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 33x, you may consider Hangzhou Sunrise Technology Co.,Ltd. (SZSE:300360) as a highly attractive investment with its 13.2x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.
Hangzhou Sunrise TechnologyLtd 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 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, Hangzhou Sunrise TechnologyLtd would need to produce anemic growth that's substantially trailing the market.
If we review the last year of earnings growth, the company posted a worthy increase of 13%. The latest three year period has also seen an excellent 96% overall rise in EPS, aided somewhat 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 three years should generate growth of 13% per annum as estimated by the five analysts watching the company. That's shaping up to be materially lower than the 25% per year growth forecast for the broader market.
With this information, we can see why Hangzhou Sunrise TechnologyLtd is trading at a P/E lower than the market. 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 Hangzhou Sunrise TechnologyLtd's P/E
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.
As we suspected, our examination of Hangzhou Sunrise TechnologyLtd's analyst forecasts revealed that its inferior earnings outlook 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.
Having said that, be aware Hangzhou Sunrise TechnologyLtd is showing 1 warning sign in our investment analysis, you should know about.
It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).
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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.