Hengdian Group DMEGC Magnetics Co. ,Ltd's (SZSE:002056) Share Price Is Matching Sentiment Around Its Earnings

Hengdian Group DMEGC Magnetics Co. ,Ltd's (SZSE:002056) price-to-earnings (or "P/E") ratio of 12.1x 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 28x and even P/E's above 53x 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.

Hengdian Group DMEGC Magnetics Ltd hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

View our latest analysis for Hengdian Group DMEGC Magnetics Ltd

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

Is There Any Growth For Hengdian Group DMEGC Magnetics Ltd?

The only time you'd be truly comfortable seeing a P/E as depressed as Hengdian Group DMEGC Magnetics Ltd's is when the company's growth is on track to lag the market decidedly.

Retrospectively, the last year delivered a frustrating 15% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 35% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 13% each year over the next three years. That's shaping up to be materially lower than the 24% per annum growth forecast for the broader market.

With this information, we can see why Hengdian Group DMEGC Magnetics Ltd is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Bottom Line On Hengdian Group DMEGC Magnetics Ltd's P/E

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Hengdian Group DMEGC Magnetics Ltd'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. It's hard to see the share price rising strongly in the near future under these circumstances.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Hengdian Group DMEGC Magnetics Ltd that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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.