Hangzhou Huaguang Advanced Welding Materials Co.,Ltd. (SHSE:688379) Screens Well But There Might Be A Catch

It's not a stretch to say that Hangzhou Huaguang Advanced Welding Materials Co.,Ltd.'s (SHSE:688379) price-to-earnings (or "P/E") ratio of 28.9x right now seems quite "middle-of-the-road" compared to the market in China, where the median P/E ratio is around 31x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Hangzhou Huaguang Advanced Welding MaterialsLtd certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. 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 not quite in favour.

View our latest analysis for Hangzhou Huaguang Advanced Welding MaterialsLtd

Keen to find out how analysts think Hangzhou Huaguang Advanced Welding MaterialsLtd's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Hangzhou Huaguang Advanced Welding MaterialsLtd's Growth Trending?

Hangzhou Huaguang Advanced Welding MaterialsLtd's P/E ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 303% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 49% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the sole analyst covering the company suggest earnings should grow by 33% per annum over the next three years. Meanwhile, the rest of the market is forecast to only expand by 25% each year, which is noticeably less attractive.

With this information, we find it interesting that Hangzhou Huaguang Advanced Welding MaterialsLtd is trading at a fairly similar P/E to the market. It may be that most investors aren't convinced the company can achieve future growth expectations.

The Key Takeaway

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.

We've established that Hangzhou Huaguang Advanced Welding MaterialsLtd currently trades on a lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

Having said that, be aware Hangzhou Huaguang Advanced Welding MaterialsLtd is showing 2 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.