Zhejiang Zhaofeng Mechanical and Electronic Co.,Ltd. (SZSE:300695) Surges 25% Yet Its Low P/E Is No Reason For Excitement

Those holding Zhejiang Zhaofeng Mechanical and Electronic Co.,Ltd. (SZSE:300695) shares would be relieved that the share price has rebounded 25% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 12% in the last twelve months.

In spite of the firm bounce in price, Zhejiang Zhaofeng Mechanical and ElectronicLtd may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 17.2x, since almost half of all companies in China have P/E ratios greater than 30x and even P/E's higher than 55x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

The recent earnings growth at Zhejiang Zhaofeng Mechanical and ElectronicLtd would have to be considered satisfactory if not spectacular. One possibility is that the P/E is low because investors think this good 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.

See our latest analysis for Zhejiang Zhaofeng Mechanical and ElectronicLtd

Although there are no analyst estimates available for Zhejiang Zhaofeng Mechanical and ElectronicLtd, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Does Growth Match The Low P/E?

Zhejiang Zhaofeng Mechanical and ElectronicLtd's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

If we review the last year of earnings growth, the company posted a worthy increase of 4.3%. Ultimately though, it couldn't turn around the poor performance of the prior period, with EPS shrinking 22% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Comparing that to the market, which is predicted to deliver 41% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

In light of this, it's understandable that Zhejiang Zhaofeng Mechanical and ElectronicLtd's P/E would sit below the majority of other companies. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. Even just maintaining these prices could be difficult to achieve as recent earnings trends are already weighing down the shares.

The Bottom Line On Zhejiang Zhaofeng Mechanical and ElectronicLtd's P/E

Despite Zhejiang Zhaofeng Mechanical and ElectronicLtd's shares building up a head of steam, its P/E still lags most other companies. 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 Zhaofeng Mechanical and ElectronicLtd maintains its low P/E on the weakness of its sliding earnings over the medium-term, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

Before you settle on your opinion, we've discovered 1 warning sign for Zhejiang Zhaofeng Mechanical and ElectronicLtd that you should be aware of.

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.