Investors Still Aren't Entirely Convinced By Hangzhou Huaguang Advanced Welding Materials Co.,Ltd.'s (SHSE:688379) Earnings Despite 28% Price Jump

The Hangzhou Huaguang Advanced Welding Materials Co.,Ltd. (SHSE:688379) share price has done very well over the last month, posting an excellent gain of 28%. Looking back a bit further, it's encouraging to see the stock is up 82% in the last year.

Even after such a large jump in price, Hangzhou Huaguang Advanced Welding MaterialsLtd may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 29.4x, since almost half of all companies in China have P/E ratios greater than 39x and even P/E's higher than 75x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Recent times have been pleasing for Hangzhou Huaguang Advanced Welding MaterialsLtd as its earnings have risen in spite of the market's earnings going into reverse. 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.

See our latest analysis for Hangzhou Huaguang Advanced Welding MaterialsLtd

Want the full picture on analyst estimates for the company? Then our free report on Hangzhou Huaguang Advanced Welding MaterialsLtd will help you uncover what's on the horizon.

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

There's an inherent assumption that a company should underperform the market for P/E ratios like Hangzhou Huaguang Advanced Welding MaterialsLtd's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 43%. As a result, it also grew EPS by 30% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 41% during the coming year according to the sole analyst following the company. That's shaping up to be materially higher than the 37% growth forecast for the broader market.

In light of this, it's peculiar that Hangzhou Huaguang Advanced Welding MaterialsLtd's P/E sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Final Word

Hangzhou Huaguang Advanced Welding MaterialsLtd's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. 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.

We've established that Hangzhou Huaguang Advanced Welding MaterialsLtd currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

There are also other vital risk factors to consider and we've discovered 4 warning signs for Hangzhou Huaguang Advanced Welding MaterialsLtd (2 are potentially serious!) that you should be aware of before investing here.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.