Zhejiang Mustang Battery Co.,Ltd (SHSE:605378) Held Back By Insufficient Growth Even After Shares Climb 26%

Despite an already strong run, Zhejiang Mustang Battery Co.,Ltd (SHSE:605378) shares have been powering on, with a gain of 26% in the last thirty days. Taking a wider view, although not as strong as the last month, the full year gain of 22% is also fairly reasonable.

Even after such a large jump in price, Zhejiang Mustang BatteryLtd may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 27.7x, since almost half of all companies in China have P/E ratios greater than 36x and even P/E's higher than 69x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Recent times have been quite advantageous for Zhejiang Mustang BatteryLtd as its earnings have been rising very briskly. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. 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 Zhejiang Mustang BatteryLtd

Although there are no analyst estimates available for Zhejiang Mustang BatteryLtd, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Zhejiang Mustang BatteryLtd's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as low as Zhejiang Mustang BatteryLtd's is when the company's growth is on track to lag the market.

Retrospectively, the last year delivered an exceptional 63% gain to the company's bottom line. Pleasingly, EPS has also lifted 33% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

This is in contrast to the rest of the market, which is expected to grow by 38% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that Zhejiang Mustang BatteryLtd's P/E sits below the majority of other companies. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

What We Can Learn From Zhejiang Mustang BatteryLtd's P/E?

Zhejiang Mustang BatteryLtd's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Zhejiang Mustang BatteryLtd revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Plus, you should also learn about these 2 warning signs we've spotted with Zhejiang Mustang BatteryLtd (including 1 which doesn't sit too well with us).

You might be able to find a better investment than Zhejiang Mustang BatteryLtd. 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.