Zhejiang Chint Electrics Co., Ltd.'s (SHSE:601877) Subdued P/E Might Signal An Opportunity

When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 33x, you may consider Zhejiang Chint Electrics Co., Ltd. (SHSE:601877) as a highly attractive investment with its 11.9x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

Zhejiang Chint Electrics hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If you still 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 Zhejiang Chint Electrics

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Does Growth Match The Low P/E?

The only time you'd be truly comfortable seeing a P/E as depressed as Zhejiang Chint Electrics' is when the company's growth is on track to lag the market decidedly.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 8.5%. The last three years don't look nice either as the company has shrunk EPS by 42% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the five analysts covering the company suggest earnings should grow by 46% over the next year. Meanwhile, the rest of the market is forecast to only expand by 39%, which is noticeably less attractive.

In light of this, it's peculiar that Zhejiang Chint Electrics' P/E sits below the majority of other companies. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

The Key Takeaway

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Zhejiang Chint Electrics' analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Zhejiang Chint Electrics that you need to be mindful of.

If you're unsure about the strength of Zhejiang Chint Electrics' 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.