With a price-to-earnings (or "P/E") ratio of 5.9x Shanxi Lanhua Sci-Tech Venture Co.,Ltd (SHSE:600123) 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 63x 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 haven't been advantageous for Shanxi Lanhua Sci-Tech VentureLtd 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. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.

Check out our latest analysis for Shanxi Lanhua Sci-Tech VentureLtd

How Is Shanxi Lanhua Sci-Tech VentureLtd's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as depressed as Shanxi Lanhua Sci-Tech VentureLtd's is when the company's growth is on track to lag the market decidedly.

Retrospectively, the last year delivered a frustrating 29% decrease to the company's bottom line. Even so, admirably EPS has lifted 883% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Looking ahead now, EPS is anticipated to climb by 2.4% per year during the coming three years according to the dual analysts following the company. Meanwhile, the rest of the market is forecast to expand by 22% per year, which is noticeably more attractive.

In light of this, it's understandable that Shanxi Lanhua Sci-Tech VentureLtd's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

What We Can Learn From Shanxi Lanhua Sci-Tech VentureLtd's P/E?

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 Shanxi Lanhua Sci-Tech VentureLtd'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.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Shanxi Lanhua Sci-Tech VentureLtd you should know about.

You might be able to find a better investment than Shanxi Lanhua Sci-Tech VentureLtd. 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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