Improved Earnings Required Before Hangzhou Greatstar Industrial Co., Ltd (SZSE:002444) Stock's 26% Jump Looks Justified

Hangzhou Greatstar Industrial Co., Ltd (SZSE:002444) shareholders have had their patience rewarded with a 26% share price jump in the last month. The last 30 days bring the annual gain to a very sharp 43%.

Although its price has surged higher, Hangzhou Greatstar Industrial's price-to-earnings (or "P/E") ratio of 19.2x might still make it look like a buy right now compared to the market in China, where around half of the companies have P/E ratios above 32x and even P/E's above 59x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Hangzhou Greatstar Industrial certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. 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.

Check out our latest analysis for Hangzhou Greatstar Industrial

Want the full picture on analyst estimates for the company? Then our free report on Hangzhou Greatstar Industrial will help you uncover what's on the horizon.

Is There Any Growth For Hangzhou Greatstar Industrial?

In order to justify its P/E ratio, Hangzhou Greatstar Industrial would need to produce sluggish growth that's trailing the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 15% last year. EPS has also lifted 17% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 14% during the coming year according to the eleven analysts following the company. That's shaping up to be materially lower than the 37% growth forecast for the broader market.

In light of this, it's understandable that Hangzhou Greatstar Industrial's P/E sits below the majority of other companies. 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

Despite Hangzhou Greatstar Industrial's 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 Hangzhou Greatstar Industrial maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 1 warning sign for Hangzhou Greatstar Industrial 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.