Baoding Dongli Machinery Co.,Ltd. (SZSE:301298) Stock Catapults 44% Though Its Price And Business Still Lag The Market

The Baoding Dongli Machinery Co.,Ltd. (SZSE:301298) share price has done very well over the last month, posting an excellent gain of 44%. The last 30 days bring the annual gain to a very sharp 33%.

In spite of the firm bounce in price, Baoding Dongli MachineryLtd's price-to-earnings (or "P/E") ratio of 31.2x 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 40x and even P/E's above 78x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Recent times have been quite advantageous for Baoding Dongli MachineryLtd as its earnings have been rising very briskly. One possibility is that the P/E is low because investors think this strong 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 Baoding Dongli MachineryLtd

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

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

Baoding Dongli MachineryLtd'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 terrific increase of 52%. As a result, it also grew EPS by 7.9% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

This is in contrast to the rest of the market, which is expected to grow by 37% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that Baoding Dongli MachineryLtd's P/E sits below the majority of other companies. 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 Baoding Dongli MachineryLtd's P/E?

The latest share price surge wasn't enough to lift Baoding Dongli MachineryLtd's P/E close to the market median. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of Baoding Dongli MachineryLtd revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Baoding Dongli MachineryLtd (at least 1 which is a bit concerning), and understanding them should be part of your investment process.

If you're unsure about the strength of Baoding Dongli MachineryLtd'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.