When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 29x, you may consider Luxi Chemical Group Co., Ltd. (SZSE:000830) as an attractive investment with its 23.1x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
While the market has experienced earnings growth lately, Luxi Chemical Group's earnings have gone into reverse gear, which is not great. 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.
How Is Luxi Chemical Group's Growth Trending?
There's an inherent assumption that a company should underperform the market for P/E ratios like Luxi Chemical Group's to be considered reasonable.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 50%. This means it has also seen a slide in earnings over the longer-term as EPS is down 52% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Turning to the outlook, the next three years should generate growth of 36% per annum as estimated by the six analysts watching the company. That's shaping up to be materially higher than the 24% per year growth forecast for the broader market.
In light of this, it's peculiar that Luxi Chemical Group's P/E sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.
The Key Takeaway
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.
We've established that Luxi Chemical Group currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. 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.
You should always think about risks. Case in point, we've spotted 3 warning signs for Luxi Chemical Group you should be aware of.
If these risks are making you reconsider your opinion on Luxi Chemical Group, 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com