When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 29x, you may consider Jiahe Foods Industry Co., Ltd. (SHSE:605300) as an attractive investment with its 18.2x P/E ratio. 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 Jiahe Foods Industry as its earnings have been rising faster than most other companies. 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 Jiahe Foods Industry?

In order to justify its P/E ratio, Jiahe Foods Industry would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered an exceptional 121% gain to the company's bottom line. EPS has also lifted 7.4% in aggregate from three years ago, mostly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Shifting to the future, estimates from the two analysts covering the company suggest earnings should grow by 6.6% per year over the next three years. 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 Jiahe Foods Industry'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 Key Takeaway

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Jiahe Foods Industry's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Jiahe Foods Industry you should know about.

Of course, you might also be able to find a better stock than Jiahe Foods Industry. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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