When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") above 10x, you may consider Yixin Group Limited (HKG:2858) as an attractive investment with its 6.8x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Yixin Group certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. 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.

Is There Any Growth For Yixin Group?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 35% last year. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 16% each year as estimated by the two analysts watching the company. With the market only predicted to deliver 12% each year, the company is positioned for a stronger earnings result.

With this information, we find it odd that Yixin Group is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Key Takeaway

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.

Our examination of Yixin Group's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Yixin Group (at least 1 which can't be ignored), and understanding them should be part of your investment process.

If you're unsure about the strength of Yixin Group'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.