Inner Mongolia Yili Industrial Group Co., Ltd.'s (SHSE:600887) price-to-earnings (or "P/E") ratio of 12.7x might make it look like a strong buy right now compared to the market in China, where around half of the companies have P/E ratios above 29x and even P/E's above 54x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's superior to most other companies of late, Inner Mongolia Yili Industrial Group has been doing relatively well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Is There Any Growth For Inner Mongolia Yili Industrial Group?

In order to justify its P/E ratio, Inner Mongolia Yili Industrial Group would need to produce anemic growth that's substantially trailing the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 34% last year. The latest three year period has also seen an excellent 39% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 2.2% per annum during the coming three years according to the analysts following the company. That's shaping up to be materially lower than the 24% per annum growth forecast for the broader market.

In light of this, it's understandable that Inner Mongolia Yili Industrial Group's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Final Word

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.

We've established that Inner Mongolia Yili Industrial Group maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Inner Mongolia Yili Industrial Group with six simple checks will allow you to discover any risks that could be an issue.

You might be able to find a better investment than Inner Mongolia Yili Industrial Group. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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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