When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 31x, you may consider Novogene Co., Ltd. (SHSE:688315) as an attractive investment with its 26.5x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

While the market has experienced earnings growth lately, Novogene'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 you still 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.

Is There Any Growth For Novogene?

There's an inherent assumption that a company should underperform the market for P/E ratios like Novogene's to be considered reasonable.

Taking a look back first, we see that there was hardly any earnings per share growth to speak of for the company over the past year. Still, the latest three year period was better as it's delivered a decent 23% overall rise in EPS. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 17% each year as estimated by the four analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 25% per annum, which is noticeably more attractive.

With this information, we can see why Novogene 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

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Novogene'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.

Having said that, be aware Novogene is showing 1 warning sign in our investment analysis, you should know about.

If you're unsure about the strength of Novogene's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.