With a price-to-earnings (or "P/E") ratio of 15.8x Lao Feng Xiang Co., Ltd. (SHSE:600612) may be sending very bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 35x and even P/E's higher than 64x 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 so limited.

Lao Feng Xiang certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for Lao Feng Xiang

How Is Lao Feng Xiang's Growth Trending?

In order to justify its P/E ratio, Lao Feng Xiang would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered an exceptional 33% gain to the company's bottom line. Pleasingly, EPS has also lifted 57% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next year should generate growth of 10% as estimated by the eleven analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 44%, which is noticeably more attractive.

With this information, we can see why Lao Feng Xiang 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

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Lao Feng Xiang 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. It's hard to see the share price rising strongly in the near future under these circumstances.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for Lao Feng Xiang with six simple checks.

Of course, you might also be able to find a better stock than Lao Feng Xiang. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.