ZTE Corporation (SZSE:000063) Stock Catapults 31% Though Its Price And Business Still Lag The Market

ZTE Corporation (SZSE:000063) shareholders would be excited to see that the share price has had a great month, posting a 31% gain and recovering from prior weakness. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 8.4% in the last twelve months.

Even after such a large jump in price, ZTE may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 15.7x, since almost half of all companies in China have P/E ratios greater than 29x and even P/E's higher than 53x are not unusual. However, the P/E might be 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, ZTE has been doing quite well of late. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. 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 ZTE

Keen to find out how analysts think ZTE's future stacks up against the industry? In that case, our free report is a great place to start.

How Is ZTE's Growth Trending?

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

If we review the last year of earnings growth, the company posted a terrific increase of 16%. The strong recent performance means it was also able to grow EPS by 129% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 16% over the next year. That's shaping up to be materially lower than the 41% growth forecast for the broader market.

In light of this, it's understandable that ZTE'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 Final Word

Despite ZTE's shares building up a head of steam, its P/E still lags most other companies. 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.

We've established that ZTE 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 ZTE that you should be aware of.

If you're unsure about the strength of ZTE'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.