Heilongjiang Agriculture Company Limited's (SHSE:600598) Prospects Need A Boost To Lift Shares

When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 31x, you may consider Heilongjiang Agriculture Company Limited (SHSE:600598) as an attractive investment with its 20.9x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Heilongjiang Agriculture's earnings growth of late has been pretty similar to most other companies. It might be that many expect the mediocre earnings performance to degrade, which has repressed the P/E. If not, then existing shareholders have reason to be optimistic about the future direction of the share price.

Check out our latest analysis for Heilongjiang Agriculture

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What Are Growth Metrics Telling Us About The Low P/E?

There's an inherent assumption that a company should underperform the market for P/E ratios like Heilongjiang Agriculture's to be considered reasonable.

Retrospectively, the last year delivered virtually the same number to the company's bottom line as the year before. Fortunately, a few good years before that means that it was still able to grow EPS by 9.6% in total over the last three years. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 6.7% as estimated by the one analyst watching the company. That's shaping up to be materially lower than the 37% growth forecast for the broader market.

In light of this, it's understandable that Heilongjiang Agriculture's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Key Takeaway

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.

As we suspected, our examination of Heilongjiang Agriculture's analyst forecasts revealed that its inferior earnings outlook 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. It's hard to see the share price rising strongly in the near future under these circumstances.

You always need to take note of risks, for example - Heilongjiang Agriculture has 1 warning sign we think you should be aware of.

Of course, you might also be able to find a better stock than Heilongjiang Agriculture. 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.

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