Improved Earnings Required Before Hengtong Optic-Electric Co., Ltd. (SHSE:600487) Shares Find Their Feet

With a price-to-earnings (or "P/E") ratio of 15.5x Hengtong Optic-Electric Co., Ltd. (SHSE:600487) may be sending very bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 40x and even P/E's higher than 77x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Hengtong Optic-Electric 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.

Check out our latest analysis for Hengtong Optic-Electric

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Hengtong Optic-Electric.

Does Growth Match The Low P/E?

The only time you'd be truly comfortable seeing a P/E as depressed as Hengtong Optic-Electric's is when the company's growth is on track to lag the market decidedly.

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. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 23% as estimated by the eleven analysts watching the company. With the market predicted to deliver 37% growth , the company is positioned for a weaker earnings result.

In light of this, it's understandable that Hengtong Optic-Electric'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.

What We Can Learn From Hengtong Optic-Electric's P/E?

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.

We've established that Hengtong Optic-Electric 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

It is also worth noting that we have found 1 warning sign for Hengtong Optic-Electric that you need to take into consideration.

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.