DeHua TB New Decoration Material Co.,Ltd's (SZSE:002043) Business And Shares Still Trailing The Market

DeHua TB New Decoration Material Co.,Ltd's (SZSE:002043) price-to-earnings (or "P/E") ratio of 14.6x might 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 32x and even P/E's above 61x 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.

DeHua TB New Decoration MaterialLtd certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for DeHua TB New Decoration MaterialLtd

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Does Growth Match The Low P/E?

The only time you'd be truly comfortable seeing a P/E as depressed as DeHua TB New Decoration MaterialLtd's is when the company's growth is on track to lag the market decidedly.

Retrospectively, the last year delivered an exceptional 36% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 11% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 11% each year as estimated by the seven analysts watching the company. That's shaping up to be materially lower than the 19% per year growth forecast for the broader market.

In light of this, it's understandable that DeHua TB New Decoration MaterialLtd's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Bottom Line On DeHua TB New Decoration MaterialLtd'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 DeHua TB New Decoration MaterialLtd's analyst forecasts revealed that its inferior earnings outlook 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. It's hard to see the share price rising strongly in the near future under these circumstances.

Plus, you should also learn about this 1 warning sign we've spotted with DeHua TB New Decoration MaterialLtd.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on 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.