Foshan Electrical and Lighting Co.,Ltd's (SZSE:000541) Prospects Need A Boost To Lift Shares

When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 36x, you may consider Foshan Electrical and Lighting Co.,Ltd (SZSE:000541) as an attractive investment with its 29.5x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Foshan Electrical and LightingLtd certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. 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 Foshan Electrical and LightingLtd

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

How Is Foshan Electrical and LightingLtd's Growth Trending?

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

If we review the last year of earnings growth, the company posted a worthy increase of 11%. However, this wasn't enough as the latest three year period has seen an unpleasant 14% overall drop in EPS. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 24% over the next year. With the market predicted to deliver 39% growth , the company is positioned for a weaker earnings result.

In light of this, it's understandable that Foshan Electrical and LightingLtd'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.

What We Can Learn From Foshan Electrical and LightingLtd'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.

As we suspected, our examination of Foshan Electrical and LightingLtd's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. 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.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Foshan Electrical and LightingLtd that you should be aware of.

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.