There's No Escaping Foryou Corporation's (SZSE:002906) Muted Earnings Despite A 25% Share Price Rise

Foryou Corporation (SZSE:002906) shareholders have had their patience rewarded with a 25% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 53% in the last year.

Although its price has surged higher, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 39x, you may still consider Foryou as an attractive investment with its 30.6x 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.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Foryou has been doing quite well of late. 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.

See our latest analysis for Foryou

Want the full picture on analyst estimates for the company? Then our free report on Foryou will help you uncover what's on the horizon.

How Is Foryou's Growth Trending?

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

If we review the last year of earnings growth, the company posted a terrific increase of 40%. The latest three year period has also seen an excellent 87% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the twelve analysts covering the company suggest earnings should grow by 18% each year over the next three years. With the market predicted to deliver 21% growth per year, the company is positioned for a weaker earnings result.

In light of this, it's understandable that Foryou'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 Bottom Line On Foryou's P/E

Foryou's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. 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 Foryou 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

It is also worth noting that we have found 1 warning sign for Foryou that you need to take into consideration.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.