Subdued Growth No Barrier To Zhejiang Wanfeng Auto Wheel Co., Ltd.'s (SZSE:002085) Price

When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 29x, you may consider Zhejiang Wanfeng Auto Wheel Co., Ltd. (SZSE:002085) as a stock to potentially avoid with its 36.9x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

Earnings have risen at a steady rate over the last year for Zhejiang Wanfeng Auto Wheel, which is generally not a bad outcome. It might be that many expect the reasonable earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Zhejiang Wanfeng Auto Wheel

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Zhejiang Wanfeng Auto Wheel will help you shine a light on its historical performance.

Is There Enough Growth For Zhejiang Wanfeng Auto Wheel?

There's an inherent assumption that a company should outperform the market for P/E ratios like Zhejiang Wanfeng Auto Wheel's to be considered reasonable.

Retrospectively, the last year delivered a decent 5.9% gain to the company's bottom line. The latest three year period has also seen an excellent 46% overall rise in EPS, aided somewhat by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Comparing that to the market, which is predicted to deliver 36% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

In light of this, it's alarming that Zhejiang Wanfeng Auto Wheel's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Final Word

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.

We've established that Zhejiang Wanfeng Auto Wheel currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

There are also other vital risk factors to consider and we've discovered 4 warning signs for Zhejiang Wanfeng Auto Wheel (1 doesn't sit too well with us!) that you should be aware of before investing here.

If you're unsure about the strength of Zhejiang Wanfeng Auto Wheel's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.