Wuxi Zhenhua Auto Parts Co.,Ltd. (SHSE:605319) Held Back By Insufficient Growth Even After Shares Climb 31%

Wuxi Zhenhua Auto Parts Co.,Ltd. (SHSE:605319) shares have continued their recent momentum with a 31% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 62%.

In spite of the firm bounce in price, Wuxi Zhenhua Auto PartsLtd may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 21.7x, since almost half of all companies in China have P/E ratios greater than 39x and even P/E's higher than 76x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Wuxi Zhenhua Auto PartsLtd has been doing quite well of late. 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 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.

Check out our latest analysis for Wuxi Zhenhua Auto PartsLtd

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Wuxi Zhenhua Auto PartsLtd.

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

In order to justify its P/E ratio, Wuxi Zhenhua Auto PartsLtd would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered an exceptional 62% gain to the company's bottom line. Pleasingly, EPS has also lifted 143% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 25% over the next year. That's shaping up to be materially lower than the 36% growth forecast for the broader market.

In light of this, it's understandable that Wuxi Zhenhua Auto PartsLtd'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 Key Takeaway

The latest share price surge wasn't enough to lift Wuxi Zhenhua Auto PartsLtd's P/E close to the market median. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Wuxi Zhenhua Auto PartsLtd's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. 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.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Wuxi Zhenhua Auto PartsLtd that you need to be mindful of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on 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.