Market Still Lacking Some Conviction On Shenzhen Hopewind Electric Co., Ltd. (SHSE:603063)

When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 33x, you may consider Shenzhen Hopewind Electric Co., Ltd. (SHSE:603063) as an attractive investment with its 17.6x P/E ratio. 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 advantageous for Shenzhen Hopewind Electric 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 not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

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Does Growth Match The Low P/E?

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

If we review the last year of earnings growth, the company posted a terrific increase of 66%. The latest three year period has also seen an excellent 53% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 24% per year as estimated by the five analysts watching the company. That's shaping up to be similar to the 26% per year growth forecast for the broader market.

In light of this, it's peculiar that Shenzhen Hopewind Electric's P/E sits below the majority of other companies. It may be that most investors are not convinced the company can achieve future growth expectations.

What We Can Learn From Shenzhen Hopewind Electric's P/E?

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 Shenzhen Hopewind Electric currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. When we see an average earnings outlook with market-like growth, we assume potential risks are what might be placing pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because these conditions should normally provide more support to the share price.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Shenzhen Hopewind Electric that you should be aware of.

If you're unsure about the strength of Shenzhen Hopewind Electric'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.