Zhongtong Bus Holding Co.,LTD's (SZSE:000957) Business Is Trailing The Market But Its Shares Aren't

It's not a stretch to say that Zhongtong Bus Holding Co.,LTD's (SZSE:000957) price-to-earnings (or "P/E") ratio of 34.9x right now seems quite "middle-of-the-road" compared to the market in China, where the median P/E ratio is around 37x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Zhongtong Bus HoldingLTD certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If that doesn't eventuate, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Check out our latest analysis for Zhongtong Bus HoldingLTD

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Zhongtong Bus HoldingLTD will help you shine a light on its historical performance.

What Are Growth Metrics Telling Us About The P/E?

In order to justify its P/E ratio, Zhongtong Bus HoldingLTD would need to produce growth that's similar to the market.

Retrospectively, the last year delivered an exceptional 49% gain to the company's bottom line. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 38% shows it's noticeably less attractive on an annualised basis.

In light of this, it's curious that Zhongtong Bus HoldingLTD's P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. They may be setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Bottom Line On Zhongtong Bus HoldingLTD's P/E

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Zhongtong Bus HoldingLTD currently trades on a higher than expected P/E since its recent three-year growth is lower than the wider market forecast. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Many other vital risk factors can be found on the company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Zhongtong Bus HoldingLTD with six simple checks.

If you're unsure about the strength of Zhongtong Bus HoldingLTD's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.