China National Chemical Engineering Co., Ltd's (SHSE:601117) Low P/E No Reason For Excitement

China National Chemical Engineering Co., Ltd's (SHSE:601117) price-to-earnings (or "P/E") ratio of 7.6x 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 26x and even P/E's above 50x 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.

There hasn't been much to differentiate China National Chemical Engineering's and the market's earnings growth lately. It might be that many expect the mediocre earnings performance to degrade, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could pick up some stock while it's out of favour.

See our latest analysis for China National Chemical Engineering

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

Does Growth Match The Low P/E?

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

Taking a look back first, we see that there was hardly any earnings per share growth to speak of for the company over the past year. Fortunately, a few good years before that means that it was still able to grow EPS by 19% in total over the last three years. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 9.2% each year as estimated by the ten analysts watching the company. With the market predicted to deliver 23% growth per year, the company is positioned for a weaker earnings result.

In light of this, it's understandable that China National Chemical Engineering'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 China National Chemical Engineering's P/E?

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.

We've established that China National Chemical Engineering 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's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with China National Chemical Engineering, and understanding should be part of your investment process.

You might be able to find a better investment than China National Chemical Engineering. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.