With a price-to-earnings (or "P/E") ratio of 19.3x Chongqing Taiji Industry(Group) Co.,Ltd (SHSE:600129) may be sending bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 29x and even P/E's higher than 54x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
Recent times have been advantageous for Chongqing Taiji Industry(Group)Ltd as its earnings have been rising faster than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If you 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.
Is There Any Growth For Chongqing Taiji Industry(Group)Ltd?
The only time you'd be truly comfortable seeing a P/E as low as Chongqing Taiji Industry(Group)Ltd's is when the company's growth is on track to lag the market.
If we review the last year of earnings growth, the company posted a terrific increase of 47%. The latest three year period has also seen an excellent 610% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.
Shifting to the future, estimates from the seven analysts covering the company suggest earnings should grow by 23% each year over the next three years. That's shaping up to be similar to the 25% per year growth forecast for the broader market.
In light of this, it's peculiar that Chongqing Taiji Industry(Group)Ltd's P/E sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting lower selling prices.
What We Can Learn From Chongqing Taiji Industry(Group)Ltd's P/E?
We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
Our examination of Chongqing Taiji Industry(Group)Ltd's analyst forecasts revealed that its market-matching earnings outlook isn't contributing to its P/E as much as we would have predicted. When we see an average earnings outlook with market-like growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.
Having said that, be aware Chongqing Taiji Industry(Group)Ltd is showing 2 warning signs in our investment analysis, and 1 of those shouldn't be ignored.
If these risks are making you reconsider your opinion on Chongqing Taiji Industry(Group)Ltd, 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.
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