Potential Upside For Jiangsu Changhai Composite Materials Co., Ltd (SZSE:300196) Not Without Risk

When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 37x, you may consider Jiangsu Changhai Composite Materials Co., Ltd (SZSE:300196) as an attractive investment with its 23.5x 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 limited.

Jiangsu Changhai Composite Materials has been struggling lately as its earnings have declined faster than most other companies. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. You'd much rather the company wasn't bleeding earnings if you still believe in the business. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Check out our latest analysis for Jiangsu Changhai Composite Materials

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

Jiangsu Changhai Composite Materials' P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Retrospectively, the last year delivered a frustrating 58% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 57% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 93% as estimated by the nine analysts watching the company. That's shaping up to be materially higher than the 40% growth forecast for the broader market.

With this information, we find it odd that Jiangsu Changhai Composite Materials is trading at a P/E lower than the market. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

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.

We've established that Jiangsu Changhai Composite Materials currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Jiangsu Changhai Composite Materials that you should be aware of.

Of course, you might also be able to find a better stock than Jiangsu Changhai Composite Materials. 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.