Asia-potash International Investment (Guangzhou)Co.,Ltd.'s (SZSE:000893) price-to-earnings (or "P/E") ratio of 16.2x might make it look like a strong buy right now compared to the market in China, where around half of the companies have P/E ratios above 35x and even P/E's above 63x are quite common. 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.
Recent times haven't been advantageous for Asia-potash International Investment (Guangzhou)Co.Ltd as its earnings have been falling quicker than most other companies. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. You'd much rather the company wasn't bleeding earnings if you still believe in the business. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.
See our latest analysis for Asia-potash International Investment (Guangzhou)Co.Ltd
What Are Growth Metrics Telling Us About The Low P/E?
There's an inherent assumption that a company should far underperform the market for P/E ratios like Asia-potash International Investment (Guangzhou)Co.Ltd's to be considered reasonable.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 5.4%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 10,438% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.
Turning to the outlook, the next year should generate growth of 27% as estimated by the five analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 43%, which is noticeably more attractive.
In light of this, it's understandable that Asia-potash International Investment (Guangzhou)Co.Ltd's P/E sits below the majority of other companies. 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
Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
We've established that Asia-potash International Investment (Guangzhou)Co.Ltd 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
Plus, you should also learn about these 2 warning signs we've spotted with Asia-potash International Investment (Guangzhou)Co.Ltd (including 1 which is significant).
You might be able to find a better investment than Asia-potash International Investment (Guangzhou)Co.Ltd. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).
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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.