Hengli Petrochemical Co.,Ltd.'s (SHSE:600346) price-to-earnings (or "P/E") ratio of 16.6x 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 38x and even P/E's above 74x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Hengli PetrochemicalLtd certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

What Are Growth Metrics Telling Us About The Low P/E?

The only time you'd be truly comfortable seeing a P/E as depressed as Hengli PetrochemicalLtd's is when the company's growth is on track to lag the market decidedly.

Retrospectively, the last year delivered an exceptional 226% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 61% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next year should generate growth of 48% as estimated by the analysts watching the company. That's shaping up to be materially higher than the 38% growth forecast for the broader market.

In light of this, it's peculiar that Hengli PetrochemicalLtd's P/E sits below the majority of other companies. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

What We Can Learn From Hengli PetrochemicalLtd's P/E?

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.

We've established that Hengli PetrochemicalLtd currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.

You need to take note of risks, for example - Hengli PetrochemicalLtd has 2 warning signs (and 1 which is a bit concerning) we think you should know about.

You might be able to find a better investment than Hengli PetrochemicalLtd. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.