With a price-to-earnings (or "P/E") ratio of 22.4x Anhui Anke Biotechnology (Group) Co., Ltd. (SZSE:300009) may be sending 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 limited.
With its earnings growth in positive territory compared to the declining earnings of most other companies, Anhui Anke Biotechnology (Group) 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 not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
View our latest analysis for Anhui Anke Biotechnology (Group)
Does Growth Match The Low P/E?
In order to justify its P/E ratio, Anhui Anke Biotechnology (Group) would need to produce sluggish growth that's trailing the market.
If we review the last year of earnings growth, the company posted a terrific increase of 97%. The strong recent performance means it was also able to grow EPS by 363% 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.
Shifting to the future, estimates from the dual analysts covering the company suggest earnings should grow by 27% 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 Anhui Anke Biotechnology (Group) is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.
The Key Takeaway
While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
We've established that Anhui Anke Biotechnology (Group) 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. Our free balance sheet analysis for Anhui Anke Biotechnology (Group) with six simple checks will allow you to discover any risks that could be an issue.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.
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