Lacklustre Performance Is Driving Soochow Securities Co., Ltd.'s (SHSE:601555) Low P/E

Soochow Securities Co., Ltd.'s (SHSE:601555) price-to-earnings (or "P/E") ratio of 19.6x 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 37x and even P/E's above 71x 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.

Soochow Securities has been struggling lately as its earnings have declined faster than most other companies. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. You'd much rather the company wasn't bleeding earnings if you still believe in the business. 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.

Check out our latest analysis for Soochow Securities

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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 Soochow Securities' is when the company's growth is on track to lag the market.

Retrospectively, the last year delivered a frustrating 5.9% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 17% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the two analysts covering the company suggest earnings growth is heading into negative territory, declining 9.5% over the next year. With the market predicted to deliver 38% growth , that's a disappointing outcome.

With this information, we are not surprised that Soochow Securities is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Final Word

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Soochow Securities' analyst forecasts revealed that its outlook for shrinking earnings 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Before you settle on your opinion, we've discovered 1 warning sign for Soochow Securities that you should be aware of.

If you're unsure about the strength of Soochow Securities' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.