Many Still Looking Away From Zhejiang Taihua New Material Co.,Ltd (SHSE:603055)

When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 32x, you may consider Zhejiang Taihua New Material Co.,Ltd (SHSE:603055) as an attractive investment with its 26.3x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Zhejiang Taihua New MaterialLtd hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If you still 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 Taihua New MaterialLtd

Want the full picture on analyst estimates for the company? Then our free report on Zhejiang Taihua New MaterialLtd will help you uncover what's on the horizon.

Does Growth Match The Low P/E?

Zhejiang Taihua New MaterialLtd's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Retrospectively, the last year delivered a frustrating 21% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 183% overall rise in EPS, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Turning to the outlook, the next year should generate growth of 104% as estimated by the seven analysts watching the company. That's shaping up to be materially higher than the 39% growth forecast for the broader market.

In light of this, it's peculiar that Zhejiang Taihua New MaterialLtd's P/E sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Key Takeaway

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 Taihua New MaterialLtd currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Zhejiang Taihua New MaterialLtd (2 are significant) you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.