Investors Aren't Entirely Convinced By Jiangsu Rongtai Industry Co., Ltd.'s (SHSE:605133) Earnings

When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 27x, you may consider Jiangsu Rongtai Industry Co., Ltd. (SHSE:605133) as an attractive investment with its 21.4x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

While the market has experienced earnings growth lately, Jiangsu Rongtai Industry's earnings have gone into reverse gear, which is not great. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If you still 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.

View our latest analysis for Jiangsu Rongtai Industry

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

Jiangsu Rongtai Industry's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 2.2%. This means it has also seen a slide in earnings over the longer-term as EPS is down 27% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 36% per annum during the coming three years according to the dual analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 23% each year, which is noticeably less attractive.

With this information, we find it odd that Jiangsu Rongtai Industry 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 Final Word

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Jiangsu Rongtai Industry currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

Before you take the next step, you should know about the 2 warning signs for Jiangsu Rongtai Industry (1 is significant!) that we have uncovered.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.