There's No Escaping Triangle Tyre Co.,Ltd's (SHSE:601163) Muted Earnings

Triangle Tyre Co.,Ltd's (SHSE:601163) price-to-earnings (or "P/E") ratio of 7.5x 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 27x and even P/E's above 51x 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.

Recent times have been advantageous for Triangle TyreLtd as its earnings have been rising faster than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Triangle TyreLtd

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Triangle TyreLtd.

How Is Triangle TyreLtd's Growth Trending?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Triangle TyreLtd's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 59% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 34% 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.

Turning to the outlook, the next three years should generate growth of 5.8% each year as estimated by the dual analysts watching the company. With the market predicted to deliver 23% growth each year, the company is positioned for a weaker earnings result.

In light of this, it's understandable that Triangle TyreLtd's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What We Can Learn From Triangle TyreLtd's 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.

We've established that Triangle TyreLtd maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

You always need to take note of risks, for example - Triangle TyreLtd has 1 warning sign we think you should be aware of.

Of course, you might also be able to find a better stock than Triangle TyreLtd. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.