Jiangxi Hongcheng Environment Co.,Ltd.'s (SHSE:600461) price-to-earnings (or "P/E") ratio of 12.3x 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 27x and even P/E's above 50x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

There hasn't been much to differentiate Jiangxi Hongcheng EnvironmentLtd's and the market's earnings growth lately. One possibility is that the P/E is low because investors think this modest earnings performance may begin to slide. If not, then existing shareholders have reason to be optimistic about the future direction of the share price.

Is There Any Growth For Jiangxi Hongcheng EnvironmentLtd?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Jiangxi Hongcheng EnvironmentLtd's to be considered reasonable.

Retrospectively, the last year delivered virtually the same number to the company's bottom line as the year before. The longer-term trend has been no better as the company has no earnings growth to show for over the last three years either. Therefore, it's fair to say that earnings growth has definitely eluded the company recently.

Looking ahead now, EPS is anticipated to climb by 4.2% each year during the coming three years according to the sole analyst following the company. That's shaping up to be materially lower than the 23% per annum growth forecast for the broader market.

In light of this, it's understandable that Jiangxi Hongcheng EnvironmentLtd'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

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Jiangxi Hongcheng EnvironmentLtd's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Jiangxi Hongcheng EnvironmentLtd (of which 1 is potentially serious!) you should know about.

Of course, you might also be able to find a better stock than Jiangxi Hongcheng EnvironmentLtd. 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.