With a price-to-earnings (or "P/E") ratio of 2.7x Zhejiang Tengy Environmental Technology Co., Ltd (HKG:1527) may be sending very bullish signals at the moment, given that almost half of all companies in Hong Kong have P/E ratios greater than 10x and even P/E's higher than 20x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.
For example, consider that Zhejiang Tengy Environmental Technology's financial performance has been poor lately as its earnings have been in decline. It might be that many expect the disappointing earnings performance to continue or accelerate, 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.
View our latest analysis for Zhejiang Tengy Environmental Technology
What Are Growth Metrics Telling Us About The Low P/E?
In order to justify its P/E ratio, Zhejiang Tengy Environmental Technology would need to produce anemic growth that's substantially trailing the market.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 1.6%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 1,320% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.
Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 21% shows it's noticeably more attractive on an annualised basis.
In light of this, it's peculiar that Zhejiang Tengy Environmental Technology's P/E sits below the majority of other companies. It looks like most investors are not convinced the company can maintain its recent growth rates.
The Key Takeaway
Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
Our examination of Zhejiang Tengy Environmental Technology revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. When we see strong earnings 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 if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.
There are also other vital risk factors to consider before investing and we've discovered 3 warning signs for Zhejiang Tengy Environmental Technology that you should be aware of.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.
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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.