Insufficient Growth At Anhui Jiangnan Chemical Industry Co.,Ltd. (SZSE:002226) Hampers Share Price

With a price-to-earnings (or "P/E") ratio of 18.4x Anhui Jiangnan Chemical Industry Co.,Ltd. (SZSE:002226) may be sending very bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 40x and even P/E's higher than 78x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Anhui Jiangnan Chemical IndustryLtd has been doing quite well of late. 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 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 Anhui Jiangnan Chemical IndustryLtd

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

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

Anhui Jiangnan Chemical IndustryLtd'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 growth, the company posted a terrific increase of 160%. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 1.8% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 26% during the coming year according to the dual analysts following the company. That's shaping up to be materially lower than the 37% growth forecast for the broader market.

With this information, we can see why Anhui Jiangnan Chemical IndustryLtd 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 Final Word

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.

As we suspected, our examination of Anhui Jiangnan Chemical IndustryLtd'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.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for Anhui Jiangnan Chemical IndustryLtd with six simple checks on some of these key factors.

You might be able to find a better investment than Anhui Jiangnan Chemical IndustryLtd. 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.