A Piece Of The Puzzle Missing From Huizhou Desay SV Automotive Co., Ltd.'s (SZSE:002920) Share Price

When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 36x, you may consider Huizhou Desay SV Automotive Co., Ltd. (SZSE:002920) as an attractive investment with its 30.7x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Huizhou Desay SV Automotive has been doing quite well of late. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Huizhou Desay SV Automotive

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

In order to justify its P/E ratio, Huizhou Desay SV Automotive would need to produce sluggish growth that's trailing the market.

If we review the last year of earnings growth, the company posted a terrific increase of 37%. The strong recent performance means it was also able to grow EPS by 188% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 33% per year during the coming three years according to the analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 21% per annum, which is noticeably less attractive.

With this information, we find it odd that Huizhou Desay SV Automotive is trading at a P/E lower than the market. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

What We Can Learn From Huizhou Desay SV Automotive'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.

We've established that Huizhou Desay SV Automotive currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.

It is also worth noting that we have found 2 warning signs for Huizhou Desay SV Automotive (1 is a bit unpleasant!) that you need to take into consideration.

If these risks are making you reconsider your opinion on Huizhou Desay SV Automotive, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.