Zhong Wang Fabric Co.,Ltd. (SHSE:605003) Held Back By Insufficient Growth Even After Shares Climb 27%

Zhong Wang Fabric Co.,Ltd. (SHSE:605003) shareholders have had their patience rewarded with a 27% share price jump in the last month. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

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 38x, you may still consider Zhong Wang FabricLtd as a highly attractive investment with its 6.8x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Zhong Wang FabricLtd has been doing quite well of late. 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 Zhong Wang FabricLtd

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

Does Growth Match The Low P/E?

The only time you'd be truly comfortable seeing a P/E as depressed as Zhong Wang FabricLtd's is when the company's growth is on track to lag the market decidedly.

Retrospectively, the last year delivered an exceptional 372% gain to the company's bottom line. Pleasingly, EPS has also lifted 112% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to slump, contracting by 67% during the coming year according to the one analyst following the company. That's not great when the rest of the market is expected to grow by 40%.

With this information, we are not surprised that Zhong Wang FabricLtd is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Bottom Line On Zhong Wang FabricLtd's P/E

Zhong Wang FabricLtd's recent share price jump still sees its P/E sitting firmly flat on the ground. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Zhong Wang FabricLtd maintains its low P/E on the weakness of its forecast for sliding earnings, 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.

Before you take the next step, you should know about the 3 warning signs for Zhong Wang FabricLtd (2 are a bit concerning!) that we have uncovered.

If these risks are making you reconsider your opinion on Zhong Wang FabricLtd, 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.