When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 36x, you may consider Sichuan Kelun Pharmaceutical Co., Ltd. (SZSE:002422) as an attractive investment with its 18.9x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Sichuan Kelun Pharmaceutical has been doing quite well of late. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. If you 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.

Check out our latest analysis for Sichuan Kelun Pharmaceutical

Does Growth Match The Low P/E?

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

Retrospectively, the last year delivered an exceptional 34% gain to the company's bottom line. The latest three year period has also seen an excellent 319% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 9.2% as estimated by the seven analysts watching the company. With the market predicted to deliver 43% growth , the company is positioned for a weaker earnings result.

In light of this, it's understandable that Sichuan Kelun Pharmaceutical'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.

The Bottom Line On Sichuan Kelun Pharmaceutical's P/E

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Sichuan Kelun Pharmaceutical'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.

Plus, you should also learn about these 2 warning signs we've spotted with Sichuan Kelun Pharmaceutical.

Of course, you might also be able to find a better stock than Sichuan Kelun Pharmaceutical. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.