With a price-to-earnings (or "P/E") ratio of 23.1x Foshan Electrical and Lighting Co.,Ltd (SZSE:000541) may be sending bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 27x and even P/E's higher than 51x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Foshan Electrical and LightingLtd has been doing quite well of late. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If you 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.

Is There Any Growth For Foshan Electrical and LightingLtd?

In order to justify its P/E ratio, Foshan Electrical and LightingLtd would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered an exceptional 22% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 6.2% drop in EPS in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the five analysts covering the company suggest earnings should grow by 18% per year over the next three years. That's shaping up to be similar to the 19% per annum growth forecast for the broader market.

With this information, we find it odd that Foshan Electrical and LightingLtd is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting lower selling prices.

The Key Takeaway

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.

Our examination of Foshan Electrical and LightingLtd's analyst forecasts revealed that its market-matching earnings outlook isn't contributing to its P/E as much as we would have predicted. There could be some unobserved threats to earnings preventing the P/E ratio from matching the outlook. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

You should always think about risks. Case in point, we've spotted 3 warning signs for Foshan Electrical and LightingLtd you should be aware of.

If you're unsure about the strength of Foshan Electrical and LightingLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.