When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 35x, you may consider Keda Industrial Group Co., Ltd. (SHSE:600499) as a highly attractive investment with its 7.3x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.
Recent times haven't been advantageous for Keda Industrial Group as its earnings have been falling quicker than most other companies. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. You'd much rather the company wasn't bleeding earnings if you still believe in the business. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.
See our latest analysis for Keda Industrial Group
How Is Keda Industrial Group's Growth Trending?
Keda Industrial Group's P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 31%. Even so, admirably EPS has lifted 2,201% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.
Shifting to the future, estimates from the three analysts covering the company suggest earnings growth is heading into negative territory, declining 6.2% over the next year. With the market predicted to deliver 44% growth , that's a disappointing outcome.
In light of this, it's understandable that Keda Industrial Group's P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.
What We Can Learn From Keda Industrial Group's P/E?
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.
We've established that Keda Industrial Group maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
You should always think about risks. Case in point, we've spotted 2 warning signs for Keda Industrial Group you should be aware of, and 1 of them makes us a bit uncomfortable.
Of course, you might also be able to find a better stock than Keda Industrial Group. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
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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.