Hengtong Optic-Electric Co., Ltd.'s (SHSE:600487) Low P/E No Reason For Excitement

Hengtong Optic-Electric Co., Ltd.'s (SHSE:600487) price-to-earnings (or "P/E") ratio of 16.6x 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 37x and even P/E's above 74x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Hengtong Optic-Electric 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.

Check out our latest analysis for Hengtong Optic-Electric

Want the full picture on analyst estimates for the company? Then our free report on Hengtong Optic-Electric will help you uncover what's on the horizon.

Is There Any Growth For Hengtong Optic-Electric?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Hengtong Optic-Electric's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 34% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 65% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 24% during the coming year according to the ten analysts following the company. That's shaping up to be materially lower than the 38% growth forecast for the broader market.

With this information, we can see why Hengtong Optic-Electric is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Final Word

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Hengtong Optic-Electric'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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Having said that, be aware Hengtong Optic-Electric is showing 1 warning sign in our investment analysis, you should know about.

If you're unsure about the strength of Hengtong Optic-Electric's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.