Henan Zhongfu Industrial Co.,Ltd (SHSE:600595) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 4.6% over the last year.
In spite of the firm bounce in price, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 30x, you may still consider Henan Zhongfu IndustrialLtd as an attractive investment with its 19.2x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.
Henan Zhongfu IndustrialLtd has been struggling lately as its earnings have declined faster than most other companies. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.
Does Growth Match The Low P/E?
The only time you'd be truly comfortable seeing a P/E as low as Henan Zhongfu IndustrialLtd's is when the company's growth is on track to lag the market.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 46%. Still, the latest three year period has seen an excellent 454% overall rise in EPS, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.
Shifting to the future, estimates from the two analysts covering the company suggest earnings should grow by 152% over the next year. That's shaping up to be materially higher than the 41% growth forecast for the broader market.
With this information, we find it odd that Henan Zhongfu IndustrialLtd is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.
The Final Word
The latest share price surge wasn't enough to lift Henan Zhongfu IndustrialLtd's P/E close to the market median. 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.
Our examination of Henan Zhongfu IndustrialLtd'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. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.
You always need to take note of risks, for example - Henan Zhongfu IndustrialLtd has 1 warning sign we think you should be aware of.
If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
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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.