Benign Growth For Huaming Power Equipment Co.,Ltd (SZSE:002270) Underpins Its Share Price

When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 39x, you may consider Huaming Power Equipment Co.,Ltd (SZSE:002270) as an attractive investment with its 22.6x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Huaming Power EquipmentLtd certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. 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 Huaming Power EquipmentLtd

Keen to find out how analysts think Huaming Power EquipmentLtd's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Huaming Power EquipmentLtd's Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like Huaming Power EquipmentLtd's to be considered reasonable.

Retrospectively, the last year delivered a decent 12% gain to the company's bottom line. The solid recent performance means it was also able to grow EPS by 25% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Shifting to the future, estimates from the twelve analysts covering the company suggest earnings should grow by 30% over the next year. Meanwhile, the rest of the market is forecast to expand by 37%, which is noticeably more attractive.

With this information, we can see why Huaming Power EquipmentLtd is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What We Can Learn From Huaming Power EquipmentLtd's P/E?

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Huaming Power EquipmentLtd 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Huaming Power EquipmentLtd that you should be aware of.

If these risks are making you reconsider your opinion on Huaming Power EquipmentLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.