Lacklustre Performance Is Driving Cangzhou Mingzhu Plastic Co.,Ltd.'s (SZSE:002108) Low P/E

Cangzhou Mingzhu Plastic Co.,Ltd.'s (SZSE:002108) price-to-earnings (or "P/E") ratio of 30.1x 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 35x and even P/E's above 67x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

For example, consider that Cangzhou Mingzhu PlasticLtd's financial performance has been poor lately as its earnings have been in decline. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

View our latest analysis for Cangzhou Mingzhu PlasticLtd

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Cangzhou Mingzhu PlasticLtd will help you shine a light on its historical performance.

Is There Any Growth For Cangzhou Mingzhu PlasticLtd?

Cangzhou Mingzhu PlasticLtd'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.

Retrospectively, the last year delivered a frustrating 32% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 61% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 39% shows it's an unpleasant look.

With this information, we are not surprised that Cangzhou Mingzhu PlasticLtd is trading at a P/E lower than the market. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Final Word

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.

We've established that Cangzhou Mingzhu PlasticLtd maintains its low P/E on the weakness of its sliding earnings over the medium-term, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

You should always think about risks. Case in point, we've spotted 2 warning signs for Cangzhou Mingzhu PlasticLtd you should be aware of.

Of course, you might also be able to find a better stock than Cangzhou Mingzhu PlasticLtd. 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.