When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 30x, you may consider LiJiang YuLong Tourism Co., LTD. (SZSE:002033) as an attractive investment with its 24.2x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.
With earnings growth that's superior to most other companies of late, LiJiang YuLong Tourism has been doing relatively well. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
Is There Any Growth For LiJiang YuLong Tourism?
The only time you'd be truly comfortable seeing a P/E as low as LiJiang YuLong Tourism's is when the company's growth is on track to lag the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 162% last year. The strong recent performance means it was also able to grow EPS by 178% in total over the last three years. 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 three years should generate growth of 11% per annum as estimated by the four analysts watching the company. That's shaping up to be materially lower than the 21% each year growth forecast for the broader market.
With this information, we can see why LiJiang YuLong Tourism 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
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.
We've established that LiJiang YuLong Tourism maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
Plus, you should also learn about this 1 warning sign we've spotted with LiJiang YuLong Tourism.
If you're unsure about the strength of LiJiang YuLong Tourism'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.