Fewer Investors Than Expected Jumping On Zhejiang Dayuan Pumps Industry Co., Ltd (SHSE:603757)

Zhejiang Dayuan Pumps Industry Co., Ltd's (SHSE:603757) price-to-earnings (or "P/E") ratio of 16.1x might 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 39x and even P/E's above 75x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

Zhejiang Dayuan Pumps Industry has been struggling lately as its earnings have declined faster than most other companies. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. You'd much rather the company wasn't bleeding earnings if you still believe in the business. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.

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How Is Zhejiang Dayuan Pumps Industry's Growth Trending?

In order to justify its P/E ratio, Zhejiang Dayuan Pumps Industry would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered a frustrating 33% decrease to the company's bottom line. Even so, admirably EPS has lifted 49% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Turning to the outlook, the next year should generate growth of 40% as estimated by the three analysts watching the company. That's shaping up to be similar to the 37% growth forecast for the broader market.

In light of this, it's peculiar that Zhejiang Dayuan Pumps Industry'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.

The Final Word

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.

We've established that Zhejiang Dayuan Pumps Industry 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. It appears some are indeed anticipating earnings instability, because these conditions should normally provide more support to the share price.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Zhejiang Dayuan Pumps Industry that you need to be mindful of.

If these risks are making you reconsider your opinion on Zhejiang Dayuan Pumps Industry, 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.