With a price-to-earnings (or "P/E") ratio of 15.5x Jiangsu Jiangnan Water Co., Ltd. (SHSE:601199) may be sending bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 30x and even P/E's higher than 58x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.
The earnings growth achieved at Jiangsu Jiangnan Water over the last year would be more than acceptable for most companies. One possibility is that the P/E is low because investors think this respectable earnings growth might actually underperform the broader market in the near future. 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 Jiangsu Jiangnan Water?
There's an inherent assumption that a company should underperform the market for P/E ratios like Jiangsu Jiangnan Water's to be considered reasonable.
Taking a look back first, we see that the company grew earnings per share by an impressive 17% last year. The strong recent performance means it was also able to grow EPS by 39% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.
Comparing that to the market, which is predicted to deliver 36% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.
In light of this, it's understandable that Jiangsu Jiangnan Water's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.
The Key Takeaway
Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
As we suspected, our examination of Jiangsu Jiangnan Water revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.
Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Jiangsu Jiangnan Water that you should be aware of.
If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.