Huafon Chemical Co.,Ltd's (SZSE:002064) Share Price Is Matching Sentiment Around Its Earnings

Huafon Chemical Co.,Ltd's (SZSE:002064) price-to-earnings (or "P/E") ratio of 16.2x might make it look like a strong buy right now compared to the market in China, where around half of the companies have P/E ratios above 37x and even P/E's above 73x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Huafon ChemicalLtd has been doing quite well of late. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. 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.

See 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.

Does Growth Match The Low P/E?

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. Ultimately though, it couldn't turn around the poor performance of the prior period, with EPS shrinking 66% in total over the last three years. 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 28% during the coming year according to the four analysts following the company. That's shaping up to be materially lower than the 38% growth forecast for the broader market.

In light of this, it's understandable that Huafon ChemicalLtd's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Key Takeaway

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Huafon ChemicalLtd's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Huafon ChemicalLtd that you need to be mindful of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.