The Market Doesn't Like What It Sees From Zhejiang Dahua Technology Co., Ltd.'s (SZSE:002236) Earnings Yet

Zhejiang Dahua Technology Co., Ltd.'s (SZSE:002236) price-to-earnings (or "P/E") ratio of 7.2x 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 31x and even P/E's above 57x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

With earnings growth that's superior to most other companies of late, Zhejiang Dahua Technology has been doing relatively well. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. 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 Zhejiang Dahua Technology

Want the full picture on analyst estimates for the company? Then our free report on Zhejiang Dahua Technology will help you uncover what's on the horizon.

How Is Zhejiang Dahua Technology's Growth Trending?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 169% last year. The latest three year period has also seen an excellent 68% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to slump, contracting by 10% each year during the coming three years according to the analysts following the company. Meanwhile, the broader market is forecast to expand by 25% per annum, which paints a poor picture.

In light of this, it's understandable that Zhejiang Dahua Technology's P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Bottom Line On Zhejiang Dahua Technology's P/E

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. 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.

You need to take note of risks, for example - Zhejiang Dahua Technology has 2 warning signs (and 1 which can't be ignored) we think you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com