Potential Upside For China Tianying Inc. (SZSE:000035) Not Without Risk

China Tianying Inc.'s (SZSE:000035) price-to-earnings (or "P/E") ratio of 29.9x might make it look like a buy right now compared to the market in China, where around half of the companies have P/E ratios above 38x and even P/E's above 74x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Recent times have been pleasing for China Tianying as its earnings have risen in spite of the market's earnings going into reverse. 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.

Check out our latest analysis for China Tianying

Keen to find out how analysts think China Tianying's future stacks up against the industry? In that case, our free report is a great place to start.

Does Growth Match The Low P/E?

China Tianying'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.

Taking a look back first, we see that the company grew earnings per share by an impressive 19% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 44% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the two analysts covering the company suggest earnings should grow by 124% over the next year. Meanwhile, the rest of the market is forecast to only expand by 37%, which is noticeably less attractive.

In light of this, it's peculiar that China Tianying's P/E sits below the majority of other companies. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

The Key Takeaway

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 China Tianying 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.

We don't want to rain on the parade too much, but we did also find 1 warning sign for China Tianying that you need to be mindful of.

You might be able to find a better investment than China Tianying. 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.