Even With A 27% Surge, Cautious Investors Are Not Rewarding Zhuzhou Hongda Electronics Corp.,Ltd.'s (SZSE:300726) Performance Completely

Zhuzhou Hongda Electronics Corp.,Ltd. (SZSE:300726) shareholders are no doubt pleased to see that the share price has bounced 27% in the last month, although it is still struggling to make up recently lost ground. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 45% over that time.

Although its price has surged higher, Zhuzhou Hongda ElectronicsLtd may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 18.3x, since almost half of all companies in China have P/E ratios greater than 31x and even P/E's higher than 56x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

With earnings that are retreating more than the market's of late, Zhuzhou Hongda ElectronicsLtd has been very sluggish. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Check out our latest analysis for Zhuzhou Hongda ElectronicsLtd

Want the full picture on analyst estimates for the company? Then our free report on Zhuzhou Hongda ElectronicsLtd will help you uncover what's on the horizon.

How Is Zhuzhou Hongda ElectronicsLtd's Growth Trending?

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

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 32%. Still, the latest three year period has seen an excellent 44% overall rise in EPS, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 48% over the next year. Meanwhile, the rest of the market is forecast to only expand by 41%, which is noticeably less attractive.

In light of this, it's peculiar that Zhuzhou Hongda ElectronicsLtd's P/E sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Key Takeaway

Zhuzhou Hongda ElectronicsLtd's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. 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.

Our examination of Zhuzhou Hongda ElectronicsLtd's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.

You always need to take note of risks, for example - Zhuzhou Hongda ElectronicsLtd has 1 warning sign we think 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.