With a price-to-earnings (or "P/E") ratio of 12.1x Cofco Sugar Holding CO.,LTD. (SHSE:600737) may be sending very 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 quite low for a reason and it requires further investigation to determine if it's justified.

Recent times have been pleasing for Cofco Sugar HoldingLTD as its earnings have risen in spite of the market's earnings going into reverse. 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.

Check out our latest analysis for Cofco Sugar HoldingLTD

What Are Growth Metrics Telling Us About The Low P/E?

In order to justify its P/E ratio, Cofco Sugar HoldingLTD would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered an exceptional 169% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 90% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the five analysts covering the company suggest earnings should grow by 1.9% over the next year. That's shaping up to be materially lower than the 44% growth forecast for the broader market.

In light of this, it's understandable that Cofco Sugar HoldingLTD's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Key Takeaway

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 Cofco Sugar HoldingLTD maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Cofco Sugar HoldingLTD (of which 1 doesn't sit too well with us!) you should know about.

If these risks are making you reconsider your opinion on Cofco Sugar HoldingLTD, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.