There's No Escaping Jiangsu Huachang Chemical Co., Ltd's (SZSE:002274) Muted Earnings

With a price-to-earnings (or "P/E") ratio of 9x Jiangsu Huachang Chemical Co., Ltd (SZSE:002274) may be sending very bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 34x and even P/E's higher than 67x are not unusual. 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.

Recent times have been quite advantageous for Jiangsu Huachang Chemical as its earnings have been rising very briskly. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Jiangsu Huachang Chemical

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Jiangsu Huachang Chemical will help you shine a light on its historical performance.

How Is Jiangsu Huachang Chemical's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as depressed as Jiangsu Huachang Chemical's is when the company's growth is on track to lag the market decidedly.

Taking a look back first, we see that the company grew earnings per share by an impressive 66% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 20% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 37% shows it's an unpleasant look.

In light of this, it's understandable that Jiangsu Huachang Chemical's P/E would sit below the majority of other companies. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. Even just maintaining these prices could be difficult to achieve as recent earnings trends are already weighing down the shares.

The Key Takeaway

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Jiangsu Huachang Chemical maintains its low P/E on the weakness of its sliding earnings over the medium-term, 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 the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Having said that, be aware Jiangsu Huachang Chemical is showing 1 warning sign in our investment analysis, you should know about.

Of course, you might also be able to find a better stock than Jiangsu Huachang Chemical. 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.