Beijing Oriental Yuhong Waterproof Technology Co., Ltd.'s (SZSE:002271) Price Is Right But Growth Is Lacking After Shares Rocket 27%

Those holding Beijing Oriental Yuhong Waterproof Technology Co., Ltd. (SZSE:002271) shares would be relieved that the share price has rebounded 27% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 36% over that time.

Although its price has surged higher, Beijing Oriental Yuhong Waterproof Technology's price-to-earnings (or "P/E") ratio of 19x might still 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 33x and even P/E's above 61x 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.

Beijing Oriental Yuhong Waterproof Technology 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 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.

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How Is Beijing Oriental Yuhong Waterproof Technology's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as low as Beijing Oriental Yuhong Waterproof Technology's is when the company's growth is on track to lag the market.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 4.2% last year. However, this wasn't enough as the latest three year period has seen an unpleasant 42% overall drop in EPS. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 22% per year over the next three years. That's shaping up to be materially lower than the 26% per annum growth forecast for the broader market.

With this information, we can see why Beijing Oriental Yuhong Waterproof Technology is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Key Takeaway

The latest share price surge wasn't enough to lift Beijing Oriental Yuhong Waterproof Technology's P/E close to the market median. 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 Beijing Oriental Yuhong Waterproof Technology maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. 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.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Beijing Oriental Yuhong Waterproof Technology that you should be aware of.

If you're unsure about the strength of Beijing Oriental Yuhong Waterproof Technology's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.