Market Still Lacking Some Conviction On Qingdao Daneng Environmental Protection Equipment Co., Ltd. (SHSE:688501)

Qingdao Daneng Environmental Protection Equipment Co., Ltd.'s (SHSE:688501) price-to-earnings (or "P/E") ratio of 15.7x might make it look like a buy right now compared to the market in China, where around half of the companies have P/E ratios above 29x and even P/E's above 54x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Qingdao Daneng Environmental Protection Equipment 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.

See our latest analysis for Qingdao Daneng Environmental Protection Equipment

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Qingdao Daneng Environmental Protection Equipment.

Is There Any Growth For Qingdao Daneng Environmental Protection Equipment?

The only time you'd be truly comfortable seeing a P/E as low as Qingdao Daneng Environmental Protection Equipment's is when the company's growth is on track to lag the market.

Retrospectively, the last year delivered an exceptional 51% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 41% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the dual analysts covering the company suggest earnings should grow by 29% per year over the next three years. With the market only predicted to deliver 19% per annum, the company is positioned for a stronger earnings result.

In light of this, it's peculiar that Qingdao Daneng Environmental Protection Equipment's P/E sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

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 Qingdao Daneng Environmental Protection Equipment currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Qingdao Daneng Environmental Protection Equipment (1 can't be ignored) you should be aware of.

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.

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.