Investors Don't See Light At End Of Hangzhou Greatstar Industrial Co., Ltd's (SZSE:002444) Tunnel

When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 40x, you may consider Hangzhou Greatstar Industrial Co., Ltd (SZSE:002444) as a highly attractive investment with its 16.1x P/E ratio. However, the P/E might be quite 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 its earnings growth has been positive while most other companies have been seeing their earnings go backwards. 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.

Check out our latest analysis for Hangzhou Greatstar Industrial

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Hangzhou Greatstar Industrial.

How Is Hangzhou Greatstar Industrial's Growth Trending?

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

If we review the last year of earnings growth, the company posted a terrific increase of 26%. Pleasingly, EPS has also lifted 40% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the eleven analysts covering the company suggest earnings should grow by 22% over the next year. 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

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of Hangzhou Greatstar Industrial's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Hangzhou Greatstar Industrial you should know about.

Of course, you might also be able to find a better stock than Hangzhou Greatstar Industrial. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.