Zhenjiang Dongfang Electric Heating Technology Co.,Ltd (SZSE:300217) Shares Fly 37% But Investors Aren't Buying For Growth

The Zhenjiang Dongfang Electric Heating Technology Co.,Ltd (SZSE:300217) share price has done very well over the last month, posting an excellent gain of 37%. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 13% over that time.

In spite of the firm bounce in price, Zhenjiang Dongfang Electric Heating TechnologyLtd's price-to-earnings (or "P/E") ratio of 11.1x might still make it look like a strong buy right now compared to the market in China, where around half of the companies have P/E ratios above 33x and even P/E's above 63x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Zhenjiang Dongfang Electric Heating TechnologyLtd 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 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 Zhenjiang Dongfang Electric Heating TechnologyLtd

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What Are Growth Metrics Telling Us About The Low P/E?

Zhenjiang Dongfang Electric Heating TechnologyLtd's P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

Retrospectively, the last year delivered an exceptional 86% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 580% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to slump, contracting by 10% per annum during the coming three years according to the dual analysts following the company. That's not great when the rest of the market is expected to grow by 19% per year.

In light of this, it's understandable that Zhenjiang Dongfang Electric Heating TechnologyLtd's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Key Takeaway

Even after such a strong price move, Zhenjiang Dongfang Electric Heating TechnologyLtd's P/E still trails the rest of the market significantly. 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.

As we suspected, our examination of Zhenjiang Dongfang Electric Heating TechnologyLtd's analyst forecasts revealed that its outlook for shrinking earnings 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.

There are also other vital risk factors to consider and we've discovered 4 warning signs for Zhenjiang Dongfang Electric Heating TechnologyLtd (2 don't sit too well with us!) that you should be aware of before investing here.

You might be able to find a better investment than Zhenjiang Dongfang Electric Heating TechnologyLtd. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.