When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 34x, you may consider Asymchem Laboratories (Tianjin) Co., Ltd. (SZSE:002821) as a highly attractive investment with its 13.2x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

Asymchem Laboratories (Tianjin) 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.

See our latest analysis for Asymchem Laboratories (Tianjin)

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 Asymchem Laboratories (Tianjin)'s to be considered reasonable.

Retrospectively, the last year delivered a frustrating 11% decrease to the company's bottom line. Even so, admirably EPS has lifted 255% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the analysts covering the company suggest earnings growth is heading into negative territory, declining 16% over the next year. With the market predicted to deliver 43% growth , that's a disappointing outcome.

With this information, we are not surprised that Asymchem Laboratories (Tianjin) is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. 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 Asymchem Laboratories (Tianjin)'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 Asymchem Laboratories (Tianjin) 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.

Having said that, be aware Asymchem Laboratories (Tianjin) is showing 2 warning signs in our investment analysis, and 1 of those is a bit unpleasant.

If these risks are making you reconsider your opinion on Asymchem Laboratories (Tianjin), explore our interactive list of high quality stocks to get an idea of what else is out there.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.