When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 35x, you may consider Universal Scientific Industrial (Shanghai) Co., Ltd. (SHSE:601231) as a highly attractive investment with its 14.5x 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.
With earnings that are retreating more than the market's of late, Universal Scientific Industrial (Shanghai) has been very sluggish. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. You'd much rather the company wasn't bleeding earnings if you still believe in the business. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.
Check out our latest analysis for Universal Scientific Industrial (Shanghai)
Does Growth Match The Low P/E?
There's an inherent assumption that a company should far underperform the market for P/E ratios like Universal Scientific Industrial (Shanghai)'s to be considered reasonable.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 22%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 63% in total over the last three years. 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.
Looking ahead now, EPS is anticipated to climb by 9.5% during the coming year according to the six analysts following the company. Meanwhile, the rest of the market is forecast to expand by 44%, which is noticeably more attractive.
With this information, we can see why Universal Scientific Industrial (Shanghai) 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 Universal Scientific Industrial (Shanghai)'s P/E
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.
We've established that Universal Scientific Industrial (Shanghai) maintains its low P/E on the weakness of its forecast growth being lower than the wider market, 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.
Having said that, be aware Universal Scientific Industrial (Shanghai) is showing 1 warning sign in our investment analysis, you should know about.
If you're unsure about the strength of Universal Scientific Industrial (Shanghai)'s business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.