When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") above 9x, you may consider Lee & Man Paper Manufacturing Limited (HKG:2314) as an attractive investment with its 6.1x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Lee & Man Paper Manufacturing certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to degrade substantially, 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.

Is There Any Growth For Lee & Man Paper Manufacturing?

The only time you'd be truly comfortable seeing a P/E as low as Lee & Man Paper Manufacturing'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 116% last year. Still, incredibly EPS has fallen 63% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 3.7% per annum as estimated by the six analysts watching the company. That's shaping up to be materially lower than the 12% per annum growth forecast for the broader market.

In light of this, it's understandable that Lee & Man Paper Manufacturing's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Final Word

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 Lee & Man Paper Manufacturing 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. It's hard to see the share price rising strongly in the near future under these circumstances.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Lee & Man Paper Manufacturing (1 is significant) you should be aware of.

If you're unsure about the strength of Lee & Man Paper Manufacturing'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.