Earnings Working Against Hangzhou Hikvision Digital Technology Co., Ltd.'s (SZSE:002415) Share Price

With a price-to-earnings (or "P/E") ratio of 19.8x Hangzhou Hikvision Digital Technology Co., Ltd. (SZSE:002415) may be sending bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 29x and even P/E's higher than 54x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Recent times have been advantageous for Hangzhou Hikvision Digital Technology as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. 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 Hangzhou Hikvision Digital Technology

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How Is Hangzhou Hikvision Digital Technology's Growth Trending?

In order to justify its P/E ratio, Hangzhou Hikvision Digital Technology would need to produce sluggish growth that's trailing the market.

If we review the last year of earnings growth, the company posted a terrific increase of 16%. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Looking ahead now, EPS is anticipated to climb by 14% per year during the coming three years according to the analysts following the company. Meanwhile, the rest of the market is forecast to expand by 25% per year, which is noticeably more attractive.

With this information, we can see why Hangzhou Hikvision Digital Technology is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Bottom Line On Hangzhou Hikvision Digital Technology's P/E

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 Hangzhou Hikvision Digital Technology 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Having said that, be aware Hangzhou Hikvision Digital Technology is showing 1 warning sign in our investment analysis, you should know about.

If these risks are making you reconsider your opinion on Hangzhou Hikvision Digital Technology, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.

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