Ningbo Huaxiang Electronic Co., Ltd. (SZSE:002048) Screens Well But There Might Be A Catch

With a price-to-earnings (or "P/E") ratio of 9.6x Ningbo Huaxiang Electronic Co., Ltd. (SZSE:002048) may be sending very bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 27x and even P/E's higher than 51x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

There hasn't been much to differentiate Ningbo Huaxiang Electronic's and the market's retreating earnings lately. It might be that many expect the company's earnings performance to degrade further, which has repressed the P/E. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. In saying that, existing shareholders may feel hopeful about the share price if the company's earnings continue tracking the market.

Check out our latest analysis for Ningbo Huaxiang Electronic

Keen to find out how analysts think Ningbo Huaxiang Electronic's future stacks up against the industry? In that case, our free report is a great place to start.

Does Growth Match The Low P/E?

Ningbo Huaxiang Electronic's P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

Taking a look back first, we see that there was hardly any earnings per share growth to speak of for the company over the past year. The lack of growth did nothing to help the company's aggregate three-year performance, which is an unsavory 30% drop in EPS. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 19% each year as estimated by the three analysts watching the company. With the market predicted to deliver 19% growth per annum, the company is positioned for a comparable earnings result.

With this information, we find it odd that Ningbo Huaxiang Electronic is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting lower selling prices.

The Bottom Line On Ningbo Huaxiang Electronic'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 Ningbo Huaxiang Electronic currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. When we see an average earnings outlook with market-like growth, we assume potential risks are what might be placing pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because these conditions should normally provide more support to the share price.

Before you take the next step, you should know about the 1 warning sign for Ningbo Huaxiang Electronic that we have uncovered.

You might be able to find a better investment than Ningbo Huaxiang Electronic. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.