The Yangtze Optical Fibre And Cable Joint Stock Limited Company (HKG:6869) share price has done very well over the last month, posting an excellent gain of 26%. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 2.7% in the last twelve months.

In spite of the firm bounce in price, Yangtze Optical Fibre And Cable Limited may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 6.5x, since almost half of all companies in Hong Kong have P/E ratios greater than 10x and even P/E's higher than 20x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Recent times have been advantageous for Yangtze Optical Fibre And Cable Limited as its earnings have been rising faster 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.

What Are Growth Metrics Telling Us About The Low P/E?

The only time you'd be truly comfortable seeing a P/E as low as Yangtze Optical Fibre And Cable Limited'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 371% last year. The strong recent performance means it was also able to grow EPS by 41% 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 bring diminished returns, with earnings decreasing 4.3% per annum as estimated by the six analysts watching the company. With the market predicted to deliver 12% growth per annum, that's a disappointing outcome.

With this information, we are not surprised that Yangtze Optical Fibre And Cable Limited is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

What We Can Learn From Yangtze Optical Fibre And Cable Limited's P/E?

Despite Yangtze Optical Fibre And Cable Limited's shares building up a head of steam, its P/E still lags most other companies. 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.

As we suspected, our examination of Yangtze Optical Fibre And Cable Limited's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Yangtze Optical Fibre And Cable Limited (at least 1 which is significant), and understanding them should be part of your investment process.

If you're unsure about the strength of Yangtze Optical Fibre And Cable Limited'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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