Henan Lingrui Pharmaceutical Co., Ltd.'s (SHSE:600285) price-to-earnings (or "P/E") ratio of 19.1x might make it look like a buy right now compared to the market in China, where around half of the companies have P/E ratios above 32x and even P/E's above 57x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Henan Lingrui Pharmaceutical certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for Henan Lingrui Pharmaceutical

Does Growth Match The Low P/E?

The only time you'd be truly comfortable seeing a P/E as low as Henan Lingrui Pharmaceutical's is when the company's growth is on track to lag the market.

If we review the last year of earnings growth, the company posted a terrific increase of 17%. Pleasingly, EPS has also lifted 74% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 16% as estimated by the one analyst watching the company. With the market predicted to deliver 42% growth , the company is positioned for a weaker earnings result.

With this information, we can see why Henan Lingrui Pharmaceutical is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Bottom Line On Henan Lingrui Pharmaceutical's P/E

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.

We've established that Henan Lingrui Pharmaceutical maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

Before you settle on your opinion, we've discovered 1 warning sign for Henan Lingrui Pharmaceutical that you should be aware of.

You might be able to find a better investment than Henan Lingrui Pharmaceutical. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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