Huafon Chemical Co.,Ltd's (SZSE:002064) 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 39x, you may consider Huafon Chemical Co.,Ltd (SZSE:002064) as a highly attractive investment with its 15.8x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

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Recent times have been pleasing for Huafon ChemicalLtd as its earnings have risen in spite of the market's earnings going into reverse. 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 Huafon ChemicalLtd

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

How Is Huafon ChemicalLtd's Growth Trending?

In order to justify its P/E ratio, Huafon ChemicalLtd would need to produce anemic growth that's substantially trailing the market.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 9.4% last year. Still, lamentably EPS has fallen 66% in aggregate from three years ago, which is disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 26% over the next year. Meanwhile, the rest of the market is forecast to expand by 37%, which is noticeably more attractive.

With this information, we can see why Huafon ChemicalLtd is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Key Takeaway

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.

We've established that Huafon ChemicalLtd maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. 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.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Huafon ChemicalLtd you should know about.

Of course, you might also be able to find a better stock than Huafon ChemicalLtd. 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.