Benign Growth For Gansu Energy Chemical Co., Ltd. (SZSE:000552) Underpins Its Share Price

When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 32x, you may consider Gansu Energy Chemical Co., Ltd. (SZSE:000552) as a highly attractive investment with its 14.4x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Gansu Energy Chemical could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

See our latest analysis for Gansu Energy Chemical

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

How Is Gansu Energy Chemical's Growth Trending?

In order to justify its P/E ratio, Gansu Energy Chemical would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered a frustrating 61% decrease to the company's bottom line. Regardless, EPS has managed to lift by a handy 24% in aggregate from three years ago, thanks to the earlier period of growth. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.

Turning to the outlook, the next three years should generate growth of 17% each year as estimated by the only analyst watching the company. With the market predicted to deliver 26% growth per year, the company is positioned for a weaker earnings result.

With this information, we can see why Gansu Energy Chemical is trading at a P/E lower than the market. 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 Gansu Energy Chemical's P/E?

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 Gansu Energy Chemical 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.

We don't want to rain on the parade too much, but we did also find 4 warning signs for Gansu Energy Chemical (1 is significant!) that you need to be mindful of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.