The New Huadu Technology Co., Ltd. (SZSE:002264) The share price is down 26% in the last 30 days, giving back much of the gains the stock has made recently. Longer term shareholders would now have taken a real hit, with the stock down 8.1% in the past year.

Even after such a big price drop, New Huadu Technology can still send bullish signals right now with a price-to-earnings ratio (or ‘P/E’) of 17.6x, as almost half of all companies in China have P/E ratios greater than 30x and even P/Es greater than 57x are not uncommon. However, the price-to-earnings ratio may be low for a reason and further research is needed to determine if this is justified.

With earnings growth extremely strong recently, New Huadu Technology is doing very well. It may be that many expect the strong earnings numbers to deteriorate materially, which has weighed on the price-to-earnings ratio. If that doesn’t happen, existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for the new Huadu technology

We don’t have analyst forecasts, but you can see how recent trends are setting the company up for the future through our free report on New Huadu Technology’s earnings, revenue and cash flow.

What do growth figures tell us about the low price-earnings ratio?

The only time you’ll really feel comfortable with a price-to-earnings ratio as low as New Huadu Technology’s is when the company’s growth is on track to lag the market.

Looking at the past year of earnings growth, the company posted a whopping 43% increase. Pleasingly, earnings per share are also up 34% overall compared to three years ago, thanks to growth over the past twelve months. So we can start by confirming that the company has done a great job of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market’s one-year forecast for 37% growth shows it to be noticeably less attractive on an annual basis.

In light of this, it’s understandable that New Huadu Technology’s price-to-earnings ratio is lower than most other companies. Apparently many shareholders felt uncomfortable holding on to something they think will continue to haunt the stock market.

The most important takeaway

The weakening of New Huadu Technology’s shares means that its price-to-earnings ratio is now at a fairly low level. We normally caution against looking too much at price-to-earnings ratios when making investment decisions, although this can reveal a lot about what other market participants think about the company.

We find that New Huadu Technology maintains its low price-to-earnings ratio as the weakness in recent three-year growth is, as expected, lower than the broader market forecast. At this point, shareholders accept the low price/earnings because they admit that future earnings are unlikely to bring any pleasant surprises. If recent medium-term earnings trends continue, it’s difficult to see the share price rising significantly in these conditions in the near future.

Before you take the next step, you should be aware of the 2 warning signs for new Huadu technology that we have uncovered.

Naturally, You might find a fantastic investment by looking at a few good candidates. So take a look at this free list of companies with a strong growth trajectory, trading at a low price/earnings.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. We aim to provide you with targeted, long-term analysis based on fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Simply Wall St has no positions in the stocks mentioned.

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