Shandong Hualu-Hengsheng Chemical Co., Ltd.'s (SHSE:600426) Low P/E No Reason For Excitement

When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 36x, you may consider Shandong Hualu-Hengsheng Chemical Co., Ltd. (SHSE:600426) as a highly attractive investment with its 13x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Shandong Hualu-Hengsheng Chemical certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for Shandong Hualu-Hengsheng Chemical

Want the full picture on analyst estimates for the company? Then our free report on Shandong Hualu-Hengsheng Chemical will help you uncover what's on the horizon.

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

Shandong Hualu-Hengsheng Chemical's P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

If we review the last year of earnings, the company posted a result that saw barely any deviation from a year ago. Whilst it's an improvement, it wasn't enough to get the company out of the hole it was in, with earnings down 40% overall from three years ago. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to climb by 30% during the coming year according to the twelve analysts following the company. Meanwhile, the rest of the market is forecast to expand by 40%, which is noticeably more attractive.

With this information, we can see why Shandong Hualu-Hengsheng Chemical 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.

As we suspected, our examination of Shandong Hualu-Hengsheng Chemical's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. 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.

Plus, you should also learn about this 1 warning sign we've spotted with Shandong Hualu-Hengsheng Chemical.

You might be able to find a better investment than Shandong Hualu-Hengsheng Chemical. 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.