With a price-to-earnings (or "P/E") ratio of 11.2x Zhejiang Chint Electrics Co., Ltd. (SHSE:601877) may be sending very bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 32x and even P/E's higher than 59x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

Zhejiang Chint Electrics could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If you still 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.

Does Growth Match The Low P/E?

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

If we review the last year of earnings, the company posted a result that saw barely any deviation from a year ago. The lack of growth did nothing to help the company's aggregate three-year performance, which is an unsavory 2.1% drop in EPS. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to climb by 40% during the coming year according to the six analysts following the company. With the market predicted to deliver 37% growth , the company is positioned for a comparable earnings result.

With this information, we find it odd that Zhejiang Chint Electrics is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting lower selling prices.

What We Can Learn From Zhejiang Chint Electrics' P/E?

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Zhejiang Chint Electrics currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. There could be some unobserved threats to earnings preventing the P/E ratio from matching the outlook. It appears some are indeed anticipating earnings instability, because these conditions should normally provide more support to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Zhejiang Chint Electrics, and understanding should be part of your investment process.

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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