When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 35x, you may consider Yifeng Pharmacy Chain Co., Ltd. (SHSE:603939) as an attractive investment with its 25.6x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Yifeng Pharmacy Chain 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.

Check out our latest analysis for Yifeng Pharmacy Chain

Does Growth Match The Low P/E?

The only time you'd be truly comfortable seeing a P/E as low as Yifeng Pharmacy Chain's is when the company's growth is on track to lag the market.

Retrospectively, the last year delivered an exceptional 41% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 95% 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 year should generate growth of 17% as estimated by the analysts watching the company. With the market predicted to deliver 44% growth , the company is positioned for a weaker earnings result.

With this information, we can see why Yifeng Pharmacy Chain 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 Bottom Line On Yifeng Pharmacy Chain's P/E

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 Yifeng Pharmacy Chain's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. 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 Yifeng Pharmacy Chain that you should be aware of.

If you're unsure about the strength of Yifeng Pharmacy Chain'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.