With a price-to-earnings (or "P/E") ratio of 17.7x Soochow Securities Co., Ltd. (SHSE:601555) may be sending bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 33x and even P/E's higher than 63x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Soochow Securities 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.

How Is Soochow Securities' Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like Soochow Securities' to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 19%. This means it has also seen a slide in earnings over the longer-term as EPS is down 13% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 11% per year over the next three years. That's shaping up to be materially lower than the 26% each year growth forecast for the broader market.

In light of this, it's understandable that Soochow Securities' P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Key Takeaway

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Soochow Securities' analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Before you take the next step, you should know about the 1 warning sign for Soochow Securities that we have uncovered.

If these risks are making you reconsider your opinion on Soochow Securities, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.