Zhejiang Changsheng Sliding Bearings Co., Ltd.'s (SZSE:300718) Shares Leap 40% Yet They're Still Not Telling The Full Story

Zhejiang Changsheng Sliding Bearings Co., Ltd. (SZSE:300718) shareholders have had their patience rewarded with a 40% share price jump in the last month. Unfortunately, despite the strong performance over the last month, the full year gain of 4.3% isn't as attractive.

In spite of the firm bounce in price, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 34x, you may still consider Zhejiang Changsheng Sliding Bearings as an attractive investment with its 23.4x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Recent times have been pleasing for Zhejiang Changsheng Sliding Bearings as its earnings have risen in spite of the market's earnings going into reverse. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

View our latest analysis for Zhejiang Changsheng Sliding Bearings

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Is There Any Growth For Zhejiang Changsheng Sliding Bearings?

The only time you'd be truly comfortable seeing a P/E as low as Zhejiang Changsheng Sliding Bearings' is when the company's growth is on track to lag the market.

If we review the last year of earnings growth, the company posted a terrific increase of 67%. The latest three year period has also seen an excellent 34% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 22% 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.

With this information, we find it odd that Zhejiang Changsheng Sliding Bearings is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Key Takeaway

Despite Zhejiang Changsheng Sliding Bearings' shares building up a head of steam, its P/E still lags most other companies. 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 Zhejiang Changsheng Sliding Bearings currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

You should always think about risks. Case in point, we've spotted 2 warning signs for Zhejiang Changsheng Sliding Bearings you should be aware of, and 1 of them is a bit unpleasant.

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.