With a price-to-earnings (or "P/E") ratio of 11.3x Henan Yuguang Gold&Lead Co.,Ltd. (SHSE:600531) may be sending very bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 36x and even P/E's higher than 71x 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.

It looks like earnings growth has deserted Henan Yuguang Gold&LeadLtd recently, which is not something to boast about. It might be that many expect the uninspiring earnings performance to worsen, which has repressed the P/E. If not, then existing shareholders may be feeling optimistic about the future direction of the share price.

Does Growth Match The Low P/E?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Henan Yuguang Gold&LeadLtd's to be considered reasonable.

If we review the last year of earnings, the company posted a result that saw barely any deviation from a year ago. Still, the latest three year period has seen an excellent 75% overall rise in EPS, in spite of its uninspiring short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

This is in contrast to the rest of the market, which is expected to grow by 38% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why Henan Yuguang Gold&LeadLtd is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

The Bottom Line On Henan Yuguang Gold&LeadLtd's P/E

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 Henan Yuguang Gold&LeadLtd revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, 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 3 warning signs for Henan Yuguang Gold&LeadLtd (of which 1 is potentially serious!) you should know about.

If these risks are making you reconsider your opinion on Henan Yuguang Gold&LeadLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.

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