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

Zhejiang Zhaofeng Mechanical and Electronic Co.,Ltd. (SZSE:300695) shares have had a really impressive month, gaining 25% after a shaky period beforehand. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 10% in the last twelve months.

Although its price has surged higher, Zhejiang Zhaofeng Mechanical and ElectronicLtd may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 17.5x, since almost half of all companies in China have P/E ratios greater than 30x and even P/E's higher than 58x 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 limited.

The earnings growth achieved at Zhejiang Zhaofeng Mechanical and ElectronicLtd over the last year would be more than acceptable for most companies. It might be that many expect the respectable earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

See our latest analysis for Zhejiang Zhaofeng Mechanical and ElectronicLtd

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 Zhejiang Zhaofeng Mechanical and ElectronicLtd's earnings, revenue and cash flow.

Is There Any Growth For Zhejiang Zhaofeng Mechanical and ElectronicLtd?

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.

Retrospectively, the last year delivered an exceptional 19% gain to the company's bottom line. The latest three year period has also seen a 27% overall rise in EPS, aided extensively by its short-term performance. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

This is in contrast to the rest of the market, which is expected to grow by 36% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why Zhejiang Zhaofeng Mechanical and ElectronicLtd 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 Zhejiang Zhaofeng Mechanical and ElectronicLtd's P/E?

The latest share price surge wasn't enough to lift Zhejiang Zhaofeng Mechanical and ElectronicLtd's P/E close to the market median. 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.

As we suspected, our examination of Zhejiang Zhaofeng Mechanical and ElectronicLtd revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

It is also worth noting that we have found 1 warning sign for Zhejiang Zhaofeng Mechanical and ElectronicLtd that you need to take into consideration.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on 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.