Zhejiang Sanhua Intelligent Controls Co.,Ltd (SZSE:002050) Held Back By Insufficient Growth Even After Shares Climb 37%

Zhejiang Sanhua Intelligent Controls Co.,Ltd (SZSE:002050) shares have had a really impressive month, gaining 37% after a shaky period beforehand. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 20% in the last twelve months.

Although its price has surged higher, Zhejiang Sanhua Intelligent ControlsLtd may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 29.1x, since almost half of all companies in China have P/E ratios greater than 34x and even P/E's higher than 65x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

There hasn't been much to differentiate Zhejiang Sanhua Intelligent ControlsLtd's and the market's retreating earnings lately. One possibility is that the P/E is low because investors think the company's earnings may begin to slide even faster. You'd much rather the company wasn't bleeding earnings if you still believe in the business. In saying that, existing shareholders may feel hopeful about the share price if the company's earnings continue tracking the market.

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Is There Any Growth For Zhejiang Sanhua Intelligent ControlsLtd?

In order to justify its P/E ratio, Zhejiang Sanhua Intelligent ControlsLtd would need to produce sluggish growth that's trailing the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 1.3%. Even so, admirably EPS has lifted 78% in aggregate from three years ago, notwithstanding the last 12 months. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 14% per annum as estimated by the analysts watching the company. With the market predicted to deliver 19% growth per year, the company is positioned for a weaker earnings result.

With this information, we can see why Zhejiang Sanhua Intelligent ControlsLtd is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Final Word

The latest share price surge wasn't enough to lift Zhejiang Sanhua Intelligent ControlsLtd's P/E close to the market median. 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.

We've established that Zhejiang Sanhua Intelligent ControlsLtd maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Zhejiang Sanhua Intelligent ControlsLtd, and understanding them should be part of your investment process.

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.