China Sanjiang Fine Chemicals Company Limited's (HKG:2198) Sentiment Matching Earnings

China Sanjiang Fine Chemicals Company Limited's (HKG:2198) price-to-earnings (or "P/E") ratio of 5x might make it look like a strong buy right now compared to the market in Hong Kong, where around half of the companies have P/E ratios above 11x and even P/E's above 22x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

Earnings have risen firmly for China Sanjiang Fine Chemicals recently, which is pleasing to see. 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 that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

View our latest analysis for China Sanjiang Fine Chemicals

Where Does China Sanjiang Fine Chemicals' P/E Sit Within Its Industry?

An inspection of average P/E's throughout China Sanjiang Fine Chemicals' industry may help to explain its particularly low P/E ratio. You'll notice in the figure below that P/E ratios in the Chemicals industry are also lower than the market. So we'd say there could be some merit in the premise that the company's ratio being shaped by its industry at this time. Some industry P/E's don't move around a lot and right now most companies within the Chemicals industry should be getting stifled. Nevertheless, the company's P/E should be primarily influenced by its own financial performance.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on China Sanjiang Fine Chemicals' earnings, revenue and cash flow.

Is There Any Growth For China Sanjiang Fine Chemicals?

China Sanjiang Fine Chemicals' P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

If we review the last year of earnings growth, the company posted a terrific increase of 20%. However, this wasn't enough as the latest three year period has seen a very unpleasant 17% 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.

Comparing that to the market, which is predicted to deliver 9.6% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

In light of this, it's understandable that China Sanjiang Fine Chemicals' P/E would sit below the majority of other companies. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

What We Can Learn From China Sanjiang Fine Chemicals' P/E?

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.

As we suspected, our examination of China Sanjiang Fine Chemicals revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. 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.

We don't want to rain on the parade too much, but we did also find 3 warning signs for China Sanjiang Fine Chemicals that you need to be mindful of.

If these risks are making you reconsider your opinion on China Sanjiang Fine Chemicals, explore our interactive list of high quality stocks to get an idea of what else is out there.

When trading China Sanjiang Fine Chemicals or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.