Investors Aren't Buying YOUNGY Co., Ltd.'s (SZSE:002192) Earnings

When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 32x, you may consider YOUNGY Co., Ltd. (SZSE:002192) as a highly attractive investment with its 7x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

YOUNGY certainly has been doing a good job lately as it's been growing earnings more than most other companies. 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.

See our latest analysis for YOUNGY

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

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

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

Taking a look back first, we see that the company grew earnings per share by an impressive 19% last year. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Looking ahead now, EPS is anticipated to slump, contracting by 65% during the coming year according to the sole analyst following the company. With the market predicted to deliver 39% growth , that's a disappointing outcome.

With this information, we are not surprised that YOUNGY is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Final Word

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that YOUNGY maintains its low P/E on the weakness of its forecast for sliding earnings, 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with YOUNGY (at least 1 which is a bit concerning), and understanding them should be part of your investment process.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.