Investors Still Aren't Entirely Convinced By Hunan Oil Pump Co., Ltd.'s (SHSE:603319) Earnings Despite 29% Price Jump

Hunan Oil Pump Co., Ltd. (SHSE:603319) shareholders are no doubt pleased to see that the share price has bounced 29% in the last month, although it is still struggling to make up recently lost ground. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 10% in the last twelve months.

In spite of the firm bounce in price, Hunan Oil Pump's price-to-earnings (or "P/E") ratio of 13.8x might still make it look like a strong buy right now compared to the market in China, where around half of the companies have P/E ratios above 30x and even P/E's above 55x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Hunan Oil Pump has been doing quite well of late. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

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How Is Hunan Oil Pump's Growth Trending?

In order to justify its P/E ratio, Hunan Oil Pump would need to produce anemic growth that's substantially trailing the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 32% last year. EPS has also lifted 23% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Shifting to the future, estimates from the lone analyst covering the company suggest earnings should grow by 40% over the next year. That's shaping up to be similar to the 41% growth forecast for the broader market.

In light of this, it's peculiar that Hunan Oil Pump'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 Hunan Oil Pump's P/E?

Hunan Oil Pump's recent share price jump still sees its P/E sitting firmly flat on the ground. 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 Hunan Oil Pump currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. There could be some unobserved threats to earnings preventing the P/E ratio from matching the outlook. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

You should always think about risks. Case in point, we've spotted 1 warning sign for Hunan Oil Pump you should be aware of.

If these risks are making you reconsider your opinion on Hunan Oil Pump, 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.