With a price-to-earnings (or "P/E") ratio of 11.7x Changchun High-Tech Industry (Group) Co., Ltd. (SZSE:000661) may be sending very bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 37x and even P/E's higher than 74x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Recent times haven't been advantageous for Changchun High-Tech Industry (Group) as its earnings have been falling quicker than most other companies. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.

Does Growth Match The Low P/E?

The only time you'd be truly comfortable seeing a P/E as depressed as Changchun High-Tech Industry (Group)'s is when the company's growth is on track to lag the market decidedly.

Retrospectively, the last year delivered a frustrating 14% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 5.2% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the two analysts covering the company suggest earnings should grow by 51% over the next year. That's shaping up to be materially higher than the 39% growth forecast for the broader market.

With this information, we find it odd that Changchun High-Tech Industry (Group) is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

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.

Our examination of Changchun High-Tech Industry (Group)'s analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for Changchun High-Tech Industry (Group) with six simple checks.

If you're unsure about the strength of Changchun High-Tech Industry (Group)'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.