With a price-to-earnings (or "P/E") ratio of 18.3x Shanghai Foreign Service Holding Group Co., Ltd. (SHSE:600662) 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 59x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Shanghai Foreign Service Holding Group certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. 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.

Check out our latest analysis for Shanghai Foreign Service Holding Group

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

Shanghai Foreign Service Holding Group'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 virtually the same number to the company's bottom line as the year before. That's essentially a continuation of what we've seen over the last three years, as its EPS growth has been virtually non-existent for that entire period. Accordingly, shareholders probably wouldn't have been satisfied with the complete absence of medium-term growth.

Turning to the outlook, the next year should generate growth of 18% as estimated by the three analysts watching the company. With the market predicted to deliver 43% growth , the company is positioned for a weaker earnings result.

With this information, we can see why Shanghai Foreign Service Holding Group is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Final Word

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 Shanghai Foreign Service Holding Group'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. 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 1 warning sign for Shanghai Foreign Service Holding Group that we have uncovered.

You might be able to find a better investment than Shanghai Foreign Service Holding Group. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.