Despite an already strong run, Zhejiang Qianjiang Motorcycle Co., Ltd. (SZSE:000913) shares have been powering on, with a gain of 34% in the last thirty days. Notwithstanding the latest gain, the annual share price return of 9.3% isn't as impressive.
Although its price has surged higher, Zhejiang Qianjiang Motorcycle's price-to-earnings (or "P/E") ratio of 21x might still make it look like a buy right now compared to the market in China, where around half of the companies have P/E ratios above 33x and even P/E's above 62x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.
Zhejiang Qianjiang Motorcycle's earnings growth of late has been pretty similar to most other companies. It might be that many expect the mediocre earnings performance to degrade, which has repressed the P/E. If not, then existing shareholders have reason to be optimistic about the future direction of the share price.
Is There Any Growth For Zhejiang Qianjiang Motorcycle?
Zhejiang Qianjiang Motorcycle's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.
Retrospectively, the last year delivered virtually the same number to the company's bottom line as the year before. However, a few strong years before that means that it was still able to grow EPS by an impressive 55% in total over the last three years. 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 17% each year as estimated by the five analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 26% each year, which is noticeably more attractive.
In light of this, it's understandable that Zhejiang Qianjiang Motorcycle'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 Final Word
Zhejiang Qianjiang Motorcycle's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. 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 Zhejiang Qianjiang Motorcycle maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. 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.
You should always think about risks. Case in point, we've spotted 2 warning signs for Zhejiang Qianjiang Motorcycle you should be aware of.
If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
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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.