A Piece Of The Puzzle Missing From Qingdao Daneng Environmental Protection Equipment Co., Ltd.'s (SHSE:688501) Share Price

With a price-to-earnings (or "P/E") ratio of 20.9x Qingdao Daneng Environmental Protection Equipment Co., Ltd. (SHSE:688501) may be sending bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 30x and even P/E's higher than 54x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Recent times have been advantageous for Qingdao Daneng Environmental Protection Equipment as its earnings have been rising faster than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Qingdao Daneng Environmental Protection Equipment

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Does Growth Match The Low P/E?

In order to justify its P/E ratio, Qingdao Daneng Environmental Protection Equipment would need to produce sluggish growth that's trailing the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 44% last year. The latest three year period has also seen an excellent 49% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 24% each year during the coming three years according to the sole analyst following the company. With the market predicted to deliver 25% growth per year, the company is positioned for a comparable earnings result.

With this information, we find it odd that Qingdao Daneng Environmental Protection Equipment is trading at a P/E lower than the market. 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.

Our examination of Qingdao Daneng Environmental Protection Equipment's analyst forecasts revealed that its market-matching earnings outlook isn't contributing to its P/E as much as we would have predicted. 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.

You need to take note of risks, for example - Qingdao Daneng Environmental Protection Equipment has 2 warning signs (and 1 which is concerning) we think you should know about.

Of course, you might also be able to find a better stock than Qingdao Daneng Environmental Protection Equipment. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.