The Market Doesn't Like What It Sees From Zhejiang Jingsheng Mechanical & Electrical Co., Ltd.'s (SZSE:300316) Earnings Yet

Zhejiang Jingsheng Mechanical & Electrical Co., Ltd.'s (SZSE:300316) price-to-earnings (or "P/E") ratio of 6.6x 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 27x and even P/E's above 51x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Zhejiang Jingsheng Mechanical & Electrical has been doing quite well of late. 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 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 Jingsheng Mechanical & Electrical

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

In order to justify its P/E ratio, Zhejiang Jingsheng Mechanical & Electrical would need to produce anemic growth that's substantially trailing the market.

If we review the last year of earnings growth, the company posted a worthy increase of 13%. The latest three year period has also seen an excellent 272% overall rise in EPS, aided somewhat by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 2.9% each year during the coming three years according to the eight analysts following the company. With the market predicted to deliver 20% growth per annum, the company is positioned for a weaker earnings result.

In light of this, it's understandable that Zhejiang Jingsheng Mechanical & Electrical'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 Key Takeaway

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Zhejiang Jingsheng Mechanical & Electrical's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Before you take the next step, you should know about the 2 warning signs for Zhejiang Jingsheng Mechanical & Electrical (1 is a bit concerning!) that we have uncovered.

If these risks are making you reconsider your opinion on Zhejiang Jingsheng Mechanical & Electrical, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.