With a price-to-earnings (or "P/E") ratio of 7.8x Sichuan Yahua Industrial Group Co., Ltd. (SZSE:002497) may be sending very 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 59x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

Recent times haven't been advantageous for Sichuan Yahua Industrial Group as its earnings have been falling quicker than most other companies. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. You'd much rather the company wasn't bleeding earnings if you still believe in the business. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.

See our latest analysis for Sichuan Yahua Industrial Group

Is There Any Growth For Sichuan Yahua Industrial Group?

In order to justify its P/E ratio, Sichuan Yahua Industrial Group would need to produce anemic growth that's substantially trailing the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 53%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 906% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Shifting to the future, estimates from the five analysts covering the company suggest earnings should grow by 8.7% over the next year. That's shaping up to be materially lower than the 43% growth forecast for the broader market.

With this information, we can see why Sichuan Yahua Industrial Group 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.

The Final Word

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.

As we suspected, our examination of Sichuan Yahua Industrial Group's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. 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 take the next step, you should know about the 3 warning signs for Sichuan Yahua Industrial Group (1 shouldn't be ignored!) that we have uncovered.

If these risks are making you reconsider your opinion on Sichuan Yahua Industrial Group, 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.