It's A Story Of Risk Vs Reward With Gansu Energy Chemical Co., Ltd. (SZSE:000552)

When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 37x, you may consider Gansu Energy Chemical Co., Ltd. (SZSE:000552) as a highly attractive investment with its 11.3x 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.

With earnings that are retreating more than the market's of late, Gansu Energy Chemical has been very sluggish. 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.

View our latest analysis for Gansu Energy Chemical

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Gansu Energy Chemical.

Does Growth Match The Low P/E?

The only time you'd be truly comfortable seeing a P/E as depressed as Gansu Energy Chemical's is when the company's growth is on track to lag the market decidedly.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 53%. The last three years don't look nice either as the company has shrunk EPS by 6.1% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 36% during the coming year according to the two analysts following the company. Meanwhile, the rest of the market is forecast to expand by 37%, which is not materially different.

With this information, we find it odd that Gansu Energy Chemical is trading at a P/E lower than the market. It may be that most investors are not convinced the company can achieve future growth expectations.

The Bottom Line On Gansu Energy Chemical'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.

Our examination of Gansu Energy Chemical's analyst forecasts revealed that its market-matching earnings outlook isn't contributing to its P/E as much as we would have predicted. When we see an average earnings outlook with market-like growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

Plus, you should also learn about these 3 warning signs we've spotted with Gansu Energy Chemical (including 1 which is significant).

Of course, you might also be able to find a better stock than Gansu Energy Chemical. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.