Why Investors Shouldn't Be Surprised By Suzhou Hengmingda Electronic Technology Co., Ltd.'s (SZSE:002947) Low P/E

When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 31x, you may consider Suzhou Hengmingda Electronic Technology Co., Ltd. (SZSE:002947) as an attractive investment with its 27.3x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

The earnings growth achieved at Suzhou Hengmingda Electronic Technology over the last year would be more than acceptable for most companies. One possibility is that the P/E is low because investors think this respectable earnings growth might actually underperform the broader market in the near future. 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.

View our latest analysis for Suzhou Hengmingda Electronic Technology

Although there are no analyst estimates available for Suzhou Hengmingda Electronic Technology, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Any Growth For Suzhou Hengmingda Electronic Technology?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 18% last year. The strong recent performance means it was also able to grow EPS by 60% 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.

Comparing that to the market, which is predicted to deliver 41% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

With this information, we can see why Suzhou Hengmingda Electronic Technology is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

The Key Takeaway

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 Suzhou Hengmingda Electronic Technology maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Suzhou Hengmingda Electronic Technology that you should be aware of.

If you're unsure about the strength of Suzhou Hengmingda Electronic Technology'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.