With a price-to-earnings (or "P/E") ratio of 7.4x Anhui Guangxin Agrochemical Co., Ltd. (SHSE:603599) may be sending very bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 36x and even P/E's higher than 65x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.
Recent times haven't been advantageous for Anhui Guangxin Agrochemical 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. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.
View our latest analysis for Anhui Guangxin Agrochemical
Does Growth Match The Low P/E?
The only time you'd be truly comfortable seeing a P/E as depressed as Anhui Guangxin Agrochemical's is when the company's growth is on track to lag the market decidedly.
Retrospectively, the last year delivered a frustrating 22% decrease to the company's bottom line. Even so, admirably EPS has lifted 240% 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.
Turning to the outlook, the next year should generate growth of 15% as estimated by the three analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 43%, which is noticeably more attractive.
In light of this, it's understandable that Anhui Guangxin Agrochemical's 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
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 Anhui Guangxin Agrochemical 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. It's hard to see the share price rising strongly in the near future under these circumstances.
There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Anhui Guangxin Agrochemical that you should be aware of.
If these risks are making you reconsider your opinion on Anhui Guangxin Agrochemical, explore our interactive list of high quality stocks to get an idea of what else is out there.
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.