Subdued Growth No Barrier To Henan Pinggao Electric Co.,Ltd. (SHSE:600312) With Shares Advancing 26%

Henan Pinggao Electric Co.,Ltd. (SHSE:600312) shareholders have had their patience rewarded with a 26% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 44% in the last year.

Even after such a large jump in price, there still wouldn't be many who think Henan Pinggao ElectricLtd's price-to-earnings (or "P/E") ratio of 27.2x is worth a mention when the median P/E in China is similar at about 30x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

With earnings growth that's superior to most other companies of late, Henan Pinggao ElectricLtd has been doing relatively well. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. 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 not quite in favour.

Check out our latest analysis for Henan Pinggao ElectricLtd

Keen to find out how analysts think Henan Pinggao ElectricLtd's future stacks up against the industry? In that case, our free report is a great place to start.

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

In order to justify its P/E ratio, Henan Pinggao ElectricLtd would need to produce growth that's similar to the market.

Retrospectively, the last year delivered an exceptional 177% gain to the company's bottom line. Pleasingly, EPS has also lifted 1,289% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the eight analysts covering the company suggest earnings should grow by 18% each year over the next three years. Meanwhile, the rest of the market is forecast to expand by 25% per year, which is noticeably more attractive.

In light of this, it's curious that Henan Pinggao ElectricLtd's P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

The Key Takeaway

Henan Pinggao ElectricLtd's stock has a lot of momentum behind it lately, which has brought its P/E level with the market. 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.

Our examination of Henan Pinggao ElectricLtd's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. 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.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Henan Pinggao ElectricLtd 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com