Market Still Lacking Some Conviction On Hubei Xingfa Chemicals Group Co., Ltd. (SHSE:600141)

With a price-to-earnings (or "P/E") ratio of 15.2x Hubei Xingfa Chemicals Group Co., Ltd. (SHSE:600141) may be sending bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 29x and even P/E's higher than 53x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Hubei Xingfa Chemicals Group hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Check out our latest analysis for Hubei Xingfa Chemicals Group

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

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

The only time you'd be truly comfortable seeing a P/E as low as Hubei Xingfa Chemicals Group's is when the company's growth is on track to lag the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 71%. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 24% in total. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.

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

With this information, we find it odd that Hubei Xingfa Chemicals Group 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 Final Word

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.

Our examination of Hubei Xingfa Chemicals Group'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.

Having said that, be aware Hubei Xingfa Chemicals Group is showing 3 warning signs in our investment analysis, and 1 of those is a bit concerning.

If you're unsure about the strength of Hubei Xingfa Chemicals Group's 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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