With a price-to-earnings (or "P/E") ratio of 27.9x China Animal Husbandry Industry Co., Ltd. (SHSE:600195) may be sending bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 33x and even P/E's higher than 61x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

While the market has experienced earnings growth lately, China Animal Husbandry Industry's earnings have gone into reverse gear, which is not great. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Does Growth Match The Low P/E?

In order to justify its P/E ratio, China Animal Husbandry Industry would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered a frustrating 39% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 26% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 28% per year during the coming three years according to the ten analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 25% each year, which is noticeably less attractive.

In light of this, it's peculiar that China Animal Husbandry Industry's P/E sits below the majority of other companies. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

The Key Takeaway

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of China Animal Husbandry Industry's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.

Before you take the next step, you should know about the 2 warning signs for China Animal Husbandry Industry that we have uncovered.

Of course, you might also be able to find a better stock than China Animal Husbandry Industry. 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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