Improved Earnings Required Before Huangshan Tourism Development Co.,Ltd. (SHSE:600054) Shares Find Their Feet

With a price-to-earnings (or "P/E") ratio of 29.3x Huangshan Tourism Development Co.,Ltd. (SHSE:600054) may be sending bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 38x and even P/E's higher than 74x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Huangshan Tourism DevelopmentLtd has been struggling lately as its earnings have declined faster than most other companies. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.

See our latest analysis for Huangshan Tourism DevelopmentLtd

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Does Growth Match The Low P/E?

The only time you'd be truly comfortable seeing a P/E as low as Huangshan Tourism DevelopmentLtd's is when the company's growth is on track to lag the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 12%. Still, the latest three year period has seen an excellent 1,112% overall rise in EPS, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 30% over the next year. With the market predicted to deliver 38% growth , the company is positioned for a weaker earnings result.

In light of this, it's understandable that Huangshan Tourism DevelopmentLtd'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 Huangshan Tourism DevelopmentLtd's P/E?

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Huangshan Tourism DevelopmentLtd maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

Plus, you should also learn about this 1 warning sign we've spotted with Huangshan Tourism DevelopmentLtd.

You might be able to find a better investment than Huangshan Tourism DevelopmentLtd. 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.