Improved Earnings Required Before Elite Color Environmental Resources Science & Technology Co., Ltd. (SZSE:002998) Shares Find Their Feet

When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 29x, you may consider Elite Color Environmental Resources Science & Technology Co., Ltd. (SZSE:002998) as a highly attractive investment with its 13.1x 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 exceedingly strong of late, Elite Color Environmental Resources Science & Technology has been doing very well. It might be that many expect the strong earnings performance to degrade substantially, 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.

View our latest analysis for Elite Color Environmental Resources Science & Technology

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Elite Color Environmental Resources Science & Technology's earnings, revenue and cash flow.

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

Elite Color Environmental Resources Science & Technology'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 30%. Still, incredibly EPS has fallen 9.8% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

In contrast to the company, the rest of the market is expected to grow by 36% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we are not surprised that Elite Color Environmental Resources Science & Technology is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Bottom Line On Elite Color Environmental Resources Science & Technology's P/E

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.

We've established that Elite Color Environmental Resources Science & Technology maintains its low P/E on the weakness of its sliding earnings over the medium-term, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Elite Color Environmental Resources Science & Technology with six simple checks on some of these key factors.

If you're unsure about the strength of Elite Color Environmental Resources Science & Technology's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.