Little Excitement Around Huafon Chemical Co.,Ltd's (SZSE:002064) Earnings

When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 33x, you may consider Huafon Chemical Co.,Ltd (SZSE:002064) as a highly attractive investment with its 15.5x 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.

With earnings growth that's superior to most other companies of late, Huafon ChemicalLtd has been doing relatively well. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. 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.

View our latest analysis for Huafon ChemicalLtd

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Huafon ChemicalLtd.

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

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

Retrospectively, the last year delivered an exceptional 19% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 34% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 16% per annum during the coming three years according to the three analysts following the company. With the market predicted to deliver 26% growth per year, the company is positioned for a weaker earnings result.

In light of this, it's understandable that Huafon ChemicalLtd's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Final Word

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.

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.

You should always think about risks. Case in point, we've spotted 1 warning sign for Huafon ChemicalLtd you should be aware of.

You might be able to find a better investment than Huafon ChemicalLtd. 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.