Take Care Before Jumping Onto Chengdu Zhimingda Electronics Co., Ltd. (SHSE:688636) Even Though It's 25% Cheaper

The Chengdu Zhimingda Electronics Co., Ltd. (SHSE:688636) share price has fared very poorly over the last month, falling by a substantial 25%. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 40% in that time.

In spite of the heavy fall in price, there still wouldn't be many who think Chengdu Zhimingda Electronics' price-to-earnings (or "P/E") ratio of 29.4x is worth a mention when the median P/E in China is similar at about 29x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Recent times have been advantageous for Chengdu Zhimingda Electronics as its earnings have been rising faster than most other companies. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

See our latest analysis for Chengdu Zhimingda Electronics

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Chengdu Zhimingda Electronics.

Does Growth Match The P/E?

There's an inherent assumption that a company should be matching the market for P/E ratios like Chengdu Zhimingda Electronics' to be considered reasonable.

If we review the last year of earnings growth, the company posted a worthy increase of 13%. However, this wasn't enough as the latest three year period has seen an unpleasant 35% 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.

Turning to the outlook, the next three years should generate growth of 42% per year as estimated by the dual analysts watching the company. With the market only predicted to deliver 21% each year, the company is positioned for a stronger earnings result.

With this information, we find it interesting that Chengdu Zhimingda Electronics is trading at a fairly similar P/E to the market. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

What We Can Learn From Chengdu Zhimingda Electronics' P/E?

Chengdu Zhimingda Electronics' plummeting stock price has brought its P/E right back to the rest of the market. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Chengdu Zhimingda Electronics currently trades on a lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Chengdu Zhimingda Electronics that you should be aware of.

You might be able to find a better investment than Chengdu Zhimingda Electronics. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.