Earnings Not Telling The Story For Zhejiang Sling Automobile Bearing Co., Ltd. (SZSE:301550) After Shares Rise 30%

The Zhejiang Sling Automobile Bearing Co., Ltd. (SZSE:301550) share price has done very well over the last month, posting an excellent gain of 30%. Notwithstanding the latest gain, the annual share price return of 6.7% isn't as impressive.

In spite of the firm bounce in price, you could still be forgiven for feeling indifferent about Zhejiang Sling Automobile Bearing's P/E ratio of 36.9x, since the median price-to-earnings (or "P/E") ratio in China is also close to 36x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

The recently shrinking earnings for Zhejiang Sling Automobile Bearing have been in line with the market. The P/E is probably moderate because investors think the company's earnings trend will continue to follow the rest of the market. You'd much rather the company wasn't bleeding earnings if you still believe in the business. In saying that, existing shareholders probably aren't too pessimistic about the share price if the company's earnings continue tracking the market.

View our latest analysis for Zhejiang Sling Automobile Bearing

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Does Growth Match The P/E?

The only time you'd be comfortable seeing a P/E like Zhejiang Sling Automobile Bearing's is when the company's growth is tracking the market closely.

Retrospectively, the last year delivered virtually the same number to the company's bottom line as the year before. However, a few strong years before that means that it was still able to grow EPS by an impressive 49% 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 34% during the coming year according to the dual analysts following the company. Meanwhile, the rest of the market is forecast to expand by 40%, which is noticeably more attractive.

With this information, we find it interesting that Zhejiang Sling Automobile Bearing is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Key Takeaway

Its shares have lifted substantially and now Zhejiang Sling Automobile Bearing's P/E is also back up to the market median. 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 Sling Automobile Bearing currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

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

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.