When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 36x, you may consider Lier Chemical Co.,LTD. (SZSE:002258) as a highly attractive investment with its 10.9x P/E ratio. 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.
Lier ChemicalLTD has been struggling lately as its earnings have declined faster than most other companies. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.
Check out our latest analysis for Lier ChemicalLTD
How Is Lier ChemicalLTD's Growth Trending?
The only time you'd be truly comfortable seeing a P/E as depressed as Lier ChemicalLTD's is when the company's growth is on track to lag the market decidedly.
Retrospectively, the last year delivered a frustrating 58% decrease to the company's bottom line. Even so, admirably EPS has lifted 64% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.
Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 17% over the next year. With the market predicted to deliver 43% growth , the company is positioned for a weaker earnings result.
In light of this, it's understandable that Lier ChemicalLTD'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 Bottom Line On Lier ChemicalLTD's P/E
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 Lier ChemicalLTD 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.
And what about other risks? Every company has them, and we've spotted 3 warning signs for Lier ChemicalLTD (of which 1 can't be ignored!) you should know about.
It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).
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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.
