Improved Earnings Required Before Autobio Diagnostics Co., Ltd. (SHSE:603658) Shares Find Their Feet

When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 29x, you may consider Autobio Diagnostics Co., Ltd. (SHSE:603658) as an attractive investment with its 19.9x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Autobio Diagnostics certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If you 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.

View our latest analysis for Autobio Diagnostics

Keen to find out how analysts think Autobio Diagnostics' future stacks up against the industry? In that case, our free report is a great place to start.

Does Growth Match The Low P/E?

Autobio Diagnostics' P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

If we review the last year of earnings growth, the company posted a worthy increase of 11%. The latest three year period has also seen an excellent 54% overall rise in EPS, aided somewhat by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 18% per annum as estimated by the eleven analysts watching the company. With the market predicted to deliver 24% growth each year, the company is positioned for a weaker earnings result.

With this information, we can see why Autobio Diagnostics 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.

The Key Takeaway

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Autobio Diagnostics maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Having said that, be aware Autobio Diagnostics is showing 1 warning sign in our investment analysis, you should know about.

If you're unsure about the strength of Autobio Diagnostics' 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.

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