When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 33x, you may consider North Industries Group Red Arrow Co., Ltd (SZSE:000519) as an attractive investment with its 22.2x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.
North Industries Group Red Arrow certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.
How Is North Industries Group Red Arrow's Growth Trending?
North Industries Group Red Arrow'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.
Retrospectively, the last year delivered an exceptional 69% gain to the company's bottom line. Pleasingly, EPS has also lifted 142% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Shifting to the future, estimates from the only analyst covering the company suggest earnings should grow by 5.3% each year over the next three years. With the market predicted to deliver 25% growth per year, the company is positioned for a weaker earnings result.
In light of this, it's understandable that North Industries Group Red Arrow'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 Bottom Line On North Industries Group Red Arrow's P/E
It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
As we suspected, our examination of North Industries Group Red Arrow's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for North Industries Group Red Arrow with six simple checks.
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.