There's No Escaping Zhejiang Development Group Co.,Ltd's (SZSE:000906) Muted Earnings Despite A 28% Share Price Rise

Zhejiang Development Group Co.,Ltd (SZSE:000906) shares have continued their recent momentum with a 28% gain in the last month alone. Unfortunately, despite the strong performance over the last month, the full year gain of 4.8% isn't as attractive.

In spite of the firm bounce in price, Zhejiang Development GroupLtd's price-to-earnings (or "P/E") ratio of 8.9x 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 36x and even P/E's above 70x 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.

With earnings that are retreating more than the market's of late, Zhejiang Development GroupLtd has been very sluggish. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. 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.

See our latest analysis for Zhejiang Development GroupLtd

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How Is Zhejiang Development GroupLtd's Growth Trending?

Zhejiang Development GroupLtd's P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 32%. The last three years don't look nice either as the company has shrunk EPS by 21% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 30% during the coming year according to the sole analyst following the company. With the market predicted to deliver 39% growth , the company is positioned for a weaker earnings result.

In light of this, it's understandable that Zhejiang Development GroupLtd'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

Shares in Zhejiang Development GroupLtd are going to need a lot more upward momentum to get the company's P/E out of its slump. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Zhejiang Development GroupLtd maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

Having said that, be aware Zhejiang Development GroupLtd is showing 3 warning signs in our investment analysis, and 2 of those are potentially serious.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.