Chongqing Chuanyi Automation Co., Ltd.'s (SHSE:603100) price-to-earnings (or "P/E") ratio of 14.5x might make it look like a buy right now compared to the market in China, where around half of the companies have P/E ratios above 29x and even P/E's above 52x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.
With its earnings growth in positive territory compared to the declining earnings of most other companies, Chongqing Chuanyi Automation has been doing quite well of late. 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.
Does Growth Match The Low P/E?
There's an inherent assumption that a company should underperform the market for P/E ratios like Chongqing Chuanyi Automation's to be considered reasonable.
Taking a look back first, we see that the company grew earnings per share by an impressive 26% last year. Pleasingly, EPS has also lifted 95% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 12% over the next year. That's shaping up to be materially lower than the 41% growth forecast for the broader market.
With this information, we can see why Chongqing Chuanyi Automation is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.
The Key Takeaway
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.
We've established that Chongqing Chuanyi Automation maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Chongqing Chuanyi Automation that you should be aware of.
If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.