Why Investors Shouldn't Be Surprised By Hongfa Technology Co., Ltd.'s (SHSE:600885) Low P/E

When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 30x, you may consider Hongfa Technology Co., Ltd. (SHSE:600885) as an attractive investment with its 20.3x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Recent times have been advantageous for Hongfa Technology as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. 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 Hongfa Technology

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Is There Any Growth For Hongfa Technology?

There's an inherent assumption that a company should underperform the market for P/E ratios like Hongfa Technology's to be considered reasonable.

If we review the last year of earnings growth, the company posted a worthy increase of 8.8%. This was backed up an excellent period prior to see EPS up by 53% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 14% per annum over the next three years. With the market predicted to deliver 25% growth per annum, the company is positioned for a weaker earnings result.

In light of this, it's understandable that Hongfa Technology's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Final Word

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.

We've established that Hongfa Technology maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

You always need to take note of risks, for example - Hongfa Technology has 1 warning sign we think you should be aware of.

If these risks are making you reconsider your opinion on Hongfa Technology, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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