When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 36x, you may consider Sirio Pharma Co., Ltd. (SZSE:300791) as an attractive investment with its 18.4x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Sirio Pharma 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 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 Sirio Pharma?

The only time you'd be truly comfortable seeing a P/E as low as Sirio Pharma's is when the company's growth is on track to lag the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 52% last year. As a result, it also grew EPS by 23% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 27% during the coming year according to the six analysts following the company. That's shaping up to be materially lower than the 38% growth forecast for the broader market.

In light of this, it's understandable that Sirio Pharma's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

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 Sirio Pharma'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.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Sirio Pharma that you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.