Anhui Hengyuan Coal Industry and Electricity Power Co.,Ltd's (SHSE:600971) price-to-earnings (or "P/E") ratio of 5.2x 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 34x and even P/E's above 61x 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.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Anhui Hengyuan Coal Industry and Electricity PowerLtd has been doing quite well of late. 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 Anhui Hengyuan Coal Industry and Electricity PowerLtd

What Are Growth Metrics Telling Us About The Low P/E?

In order to justify its P/E ratio, Anhui Hengyuan Coal Industry and Electricity PowerLtd would need to produce anemic growth that's substantially trailing the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 16% last year. Pleasingly, EPS has also lifted 210% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the two analysts covering the company suggest earnings growth is heading into negative territory, declining 9.4% over the next year. With the market predicted to deliver 43% growth , that's a disappointing outcome.

In light of this, it's understandable that Anhui Hengyuan Coal Industry and Electricity PowerLtd's P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

What We Can Learn From Anhui Hengyuan Coal Industry and Electricity PowerLtd's P/E?

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 Anhui Hengyuan Coal Industry and Electricity PowerLtd maintains its low P/E on the weakness of its forecast for sliding earnings, 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. It's hard to see the share price rising strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 1 warning sign for Anhui Hengyuan Coal Industry and Electricity PowerLtd you should be aware of.

If these risks are making you reconsider your opinion on Anhui Hengyuan Coal Industry and Electricity PowerLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.