With a price-to-earnings (or "P/E") ratio of 18.5x Qingdao Sentury Tire Co., Ltd. (SZSE:002984) may be sending bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 35x and even P/E's higher than 64x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
Qingdao Sentury Tire 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. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
View our latest analysis for Qingdao Sentury Tire
What Are Growth Metrics Telling Us About The Low P/E?
Qingdao Sentury Tire's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.
If we review the last year of earnings growth, the company posted a terrific increase of 32%. Still, incredibly EPS has fallen 4.3% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
Turning to the outlook, the next year should generate growth of 30% as estimated by the six analysts watching the company. That's shaping up to be materially lower than the 43% growth forecast for the broader market.
With this information, we can see why Qingdao Sentury Tire 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.
What We Can Learn From Qingdao Sentury Tire'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 Qingdao Sentury Tire 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.
Before you settle on your opinion, we've discovered 1 warning sign for Qingdao Sentury Tire that you should be aware of.
It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).
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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.