When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 35x, you may consider Jiangsu Changshu Automotive Trim Group Co., Ltd. (SHSE:603035) as a highly attractive investment with its 13.6x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.
Recent times have been pleasing for Jiangsu Changshu Automotive Trim Group as its earnings have risen in spite of the market's earnings going into reverse. 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.
View our latest analysis for Jiangsu Changshu Automotive Trim Group
Does Growth Match The Low P/E?
In order to justify its P/E ratio, Jiangsu Changshu Automotive Trim Group would need to produce anemic growth that's substantially trailing the market.
If we review the last year of earnings, the company posted a result that saw barely any deviation from a year ago. However, a few strong years before that means that it was still able to grow EPS by an impressive 47% 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.
Looking ahead now, EPS is anticipated to climb by 22% during the coming year according to the two analysts following the company. Meanwhile, the rest of the market is forecast to expand by 44%, which is noticeably more attractive.
In light of this, it's understandable that Jiangsu Changshu Automotive Trim Group'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.
What We Can Learn From Jiangsu Changshu Automotive Trim Group'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 Jiangsu Changshu Automotive Trim Group'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. 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 1 warning sign with Jiangsu Changshu Automotive Trim Group, and understanding should be part of your investment process.
If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
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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.