When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 28x, you may consider Inner Mongolia Yuan Xing Energy Company Limited (SZSE:000683) as an attractive investment with its 17.5x 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, Inner Mongolia Yuan Xing Energy'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.
SZSE:000683 Price to Earnings Ratio vs Industry July 27th 2024 If you'd like to see what analysts are forecasting going forward, you should check out our free report on Inner Mongolia Yuan Xing Energy.
What Are Growth Metrics Telling Us About The Low P/E?
Inner Mongolia Yuan Xing Energy's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 48%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 151% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.
Shifting to the future, estimates from the five analysts covering the company suggest earnings should grow by 35% per year over the next three years. That's shaping up to be materially higher than the 24% per year growth forecast for the broader market.
With this information, we find it odd that Inner Mongolia Yuan Xing Energy 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.
The Final Word
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 Inner Mongolia Yuan Xing Energy currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.
Plus, you should also learn about these 3 warning signs we've spotted with Inner Mongolia Yuan Xing Energy.
If these risks are making you reconsider your opinion on Inner Mongolia Yuan Xing Energy, explore our interactive list of high quality stocks to get an idea of what else is out there.
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