There's No Escaping Zhejiang Huayou Cobalt Co., Ltd's (SHSE:603799) Muted Earnings Despite A 25% Share Price Rise

Zhejiang Huayou Cobalt Co., Ltd (SHSE:603799) shares have had a really impressive month, gaining 25% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 35% in the last year.

Even after such a large jump in price, Zhejiang Huayou Cobalt may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 19.2x, since almost half of all companies in China have P/E ratios greater than 39x and even P/E's higher than 77x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

Zhejiang Huayou Cobalt 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. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.

View our latest analysis for Zhejiang Huayou Cobalt

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Zhejiang Huayou Cobalt.

Is There Any Growth For Zhejiang Huayou Cobalt?

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

Retrospectively, the last year delivered a frustrating 19% decrease to the company's bottom line. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 8.6% in total. So we can start by confirming that the company has generally done a 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 14% as estimated by the eleven analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 37%, which is noticeably more attractive.

In light of this, it's understandable that Zhejiang Huayou Cobalt'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 Key Takeaway

Even after such a strong price move, Zhejiang Huayou Cobalt's P/E still trails the rest of the market significantly. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Zhejiang Huayou Cobalt's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Plus, you should also learn about these 2 warning signs we've spotted with Zhejiang Huayou Cobalt (including 1 which shouldn't be ignored).

You might be able to find a better investment than Zhejiang Huayou Cobalt. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.