Little Excitement Around Autek China Inc.'s (SZSE:300595) Earnings

Autek China Inc.'s (SZSE:300595) price-to-earnings (or "P/E") ratio of 20.7x might 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 28x and even P/E's above 53x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Autek China 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 not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Autek China

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

How Is Autek China's Growth Trending?

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

Retrospectively, the last year delivered a decent 4.4% gain to the company's bottom line. EPS has also lifted 21% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Shifting to the future, estimates from the nine analysts covering the company suggest earnings should grow by 13% each year over the next three years. Meanwhile, the rest of the market is forecast to expand by 24% per year, which is noticeably more attractive.

In light of this, it's understandable that Autek China's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What We Can Learn From Autek China's P/E?

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Autek China's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

You always need to take note of risks, for example - Autek China has 1 warning sign we think you should be aware of.

You might be able to find a better investment than Autek China. 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.