Investors Don't See Light At End Of Zhejiang Dahua Technology Co., Ltd.'s (SZSE:002236) Tunnel

When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 35x, you may consider Zhejiang Dahua Technology Co., Ltd. (SZSE:002236) as a highly attractive investment with its 6.8x P/E ratio. 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, Zhejiang Dahua Technology 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 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.

See our latest analysis for Zhejiang Dahua Technology

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

Is There Any Growth For Zhejiang Dahua Technology?

In order to justify its P/E ratio, Zhejiang Dahua Technology would need to produce anemic growth that's substantially trailing the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 114% last year. The strong recent performance means it was also able to grow EPS by 90% 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.

Shifting to the future, estimates from the twelve analysts covering the company suggest earnings growth is heading into negative territory, declining 47% over the next year. That's not great when the rest of the market is expected to grow by 38%.

In light of this, it's understandable that Zhejiang Dahua Technology's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Key Takeaway

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Zhejiang Dahua Technology maintains its low P/E on the weakness of its forecast for sliding earnings, 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 2 warning signs for Zhejiang Dahua Technology (1 makes us a bit uncomfortable!) that you need to take into consideration.

You might be able to find a better investment than Zhejiang Dahua Technology. 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.