The Market Doesn't Like What It Sees From Hang Zhou Radical Energy-Saving Technology Co., Ltd.'s (SZSE:300652) Earnings Yet As Shares Tumble 30%

The Hang Zhou Radical Energy-Saving Technology Co., Ltd. (SZSE:300652) share price has softened a substantial 30% over the previous 30 days, handing back much of the gains the stock has made lately. The recent drop has obliterated the annual return, with the share price now down 6.5% over that longer period.

Even after such a large drop in price, Hang Zhou Radical Energy-Saving Technology's price-to-earnings (or "P/E") ratio of 21.4x 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 35x and even P/E's above 69x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Earnings have risen firmly for Hang Zhou Radical Energy-Saving Technology recently, which is pleasing to see. One possibility is that the P/E is low because investors think this respectable earnings growth might actually underperform the broader market in the near future. 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 Hang Zhou Radical Energy-Saving Technology

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Hang Zhou Radical Energy-Saving Technology's earnings, revenue and cash flow.

How Is Hang Zhou Radical Energy-Saving Technology's Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like Hang Zhou Radical Energy-Saving Technology's to be considered reasonable.

Retrospectively, the last year delivered a decent 12% gain to the company's bottom line. The latest three year period has also seen an excellent 34% 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.

This is in contrast to the rest of the market, which is expected to grow by 39% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why Hang Zhou Radical Energy-Saving Technology is trading at a P/E lower than the market. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

What We Can Learn From Hang Zhou Radical Energy-Saving Technology's P/E?

Hang Zhou Radical Energy-Saving Technology's recently weak share price has pulled its P/E below most other companies. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Hang Zhou Radical Energy-Saving Technology maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Hang Zhou Radical Energy-Saving Technology (of which 1 is potentially serious!) you should know about.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.