Lacklustre Performance Is Driving Hangzhou Alltest Biotech Co., Ltd.'s (SHSE:688606) Low P/E

When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 28x, you may consider Hangzhou Alltest Biotech Co., Ltd. (SHSE:688606) as an attractive investment with its 22.2x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Earnings have risen at a steady rate over the last year for Hangzhou Alltest Biotech, which is generally not a bad outcome. It might be that many expect the respectable earnings performance to degrade, which has repressed the P/E. If that doesn't eventuate, then existing shareholders may have reason to be optimistic about the future direction of the share price.

Check out our latest analysis for Hangzhou Alltest Biotech

Although there are no analyst estimates available for Hangzhou Alltest Biotech, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Does Growth Match The Low P/E?

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

Taking a look back first, we see that the company managed to grow earnings per share by a handy 4.7% last year. However, this wasn't enough as the latest three year period has seen an unpleasant 82% overall drop in EPS. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 36% shows it's an unpleasant look.

In light of this, it's understandable that Hangzhou Alltest Biotech's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as recent earnings trends are already weighing down the shares.

The Bottom Line On Hangzhou Alltest Biotech'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.

As we suspected, our examination of Hangzhou Alltest Biotech revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

It is also worth noting that we have found 3 warning signs for Hangzhou Alltest Biotech (2 are significant!) that you need to take into consideration.

You might be able to find a better investment than Hangzhou Alltest Biotech. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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