With a price-to-earnings (or "P/E") ratio of 9.7x Tiandi Science & Technology Co.Ltd (SHSE:600582) 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. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.
With its earnings growth in positive territory compared to the declining earnings of most other companies, Tiandi Science & TechnologyLtd has been doing quite well of late. 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 you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.
Check out our latest analysis for Tiandi Science & TechnologyLtd
Does Growth Match The Low P/E?
There's an inherent assumption that a company should far underperform the market for P/E ratios like Tiandi Science & TechnologyLtd's to be considered reasonable.
If we review the last year of earnings growth, the company posted a worthy increase of 12%. The latest three year period has also seen an excellent 99% overall rise in EPS, aided somewhat by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 13% over the next year. With the market predicted to deliver 44% growth , the company is positioned for a weaker earnings result.
With this information, we can see why Tiandi Science & TechnologyLtd 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 Final Word
It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
We've established that Tiandi Science & TechnologyLtd maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. 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.
Plus, you should also learn about this 1 warning sign we've spotted with Tiandi Science & TechnologyLtd.
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.