The Hunan Aihua Group Co., Ltd (SHSE:603989) share price has fared very poorly over the last month, falling by a substantial 25%. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 42% in that time.
Following the heavy fall in price, Hunan Aihua Group's price-to-earnings (or "P/E") ratio of 15x might make it look like a buy right now compared to the market in China, where around half of the companies have P/E ratios above 30x and even P/E's above 54x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
Recent times haven't been advantageous for Hunan Aihua Group as its earnings have been falling quicker than most other companies. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. You'd much rather the company wasn't bleeding earnings if you still believe in the business. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.
View our latest analysis for Hunan Aihua Group
Is There Any Growth For Hunan Aihua Group?
In order to justify its P/E ratio, Hunan Aihua Group would need to produce sluggish growth that's trailing the market.
Retrospectively, the last year delivered a frustrating 9.2% decrease to the company's bottom line. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 9.3% in total. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.
Shifting to the future, estimates from the lone analyst covering the company suggest earnings should grow by 21% over the next year. With the market predicted to deliver 42% growth , the company is positioned for a weaker earnings result.
In light of this, it's understandable that Hunan Aihua Group'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 Hunan Aihua Group's P/E
Hunan Aihua Group's P/E has taken a tumble along with its share price. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
As we suspected, our examination of Hunan Aihua Group's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. 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.
Before you settle on your opinion, we've discovered 1 warning sign for Hunan Aihua Group that you should be aware of.
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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