When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 30x, you may consider Zhongyin Babi Food Co., Ltd. (SHSE:605338) as an attractive investment with its 18.2x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
With its earnings growth in positive territory compared to the declining earnings of most other companies, Zhongyin Babi Food has been doing quite well of late. 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 Zhongyin Babi Food
Does Growth Match The Low P/E?
Zhongyin Babi Food'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 worthy increase of 7.9%. The latest three year period has also seen a 25% overall rise in EPS, aided somewhat by its short-term performance. Therefore, it's fair to say the earnings growth recently has been respectable for the company.
Looking ahead now, EPS is anticipated to climb by 6.2% during the coming year according to the eight analysts following the company. That's shaping up to be materially lower than the 42% growth forecast for the broader market.
In light of this, it's understandable that Zhongyin Babi Food'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.
What We Can Learn From Zhongyin Babi Food'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 Zhongyin Babi Food 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 2 warning signs for Zhongyin Babi Food that you should be aware of.
Of course, you might also be able to find a better stock than Zhongyin Babi Food. 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.