When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 31x, you may consider Shenzhen Capchem Technology Co., Ltd. (SZSE:300037) as an attractive investment with its 24.1x 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 limited.
Shenzhen Capchem Technology could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.
Does Growth Match The Low P/E?
The only time you'd be truly comfortable seeing a P/E as low as Shenzhen Capchem Technology's is when the company's growth is on track to lag the market.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 41%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 127% in total over the last three years. 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 twelve analysts covering the company suggest earnings should grow by 35% per annum over the next three years. That's shaping up to be materially higher than the 19% per annum growth forecast for the broader market.
With this information, we find it odd that Shenzhen Capchem Technology is trading at a P/E lower than the market. It looks like most investors are not convinced at all that the company can achieve future growth expectations.
What We Can Learn From Shenzhen Capchem Technology's P/E?
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.
Our examination of Shenzhen Capchem Technology's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.
Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Shenzhen Capchem Technology that you should be aware of.
Of course, you might also be able to find a better stock than Shenzhen Capchem Technology. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
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.
