Insufficient Growth At Xinxiang Richful Lube Additive Co.,Ltd. (SZSE:300910) Hampers Share Price

With a price-to-earnings (or "P/E") ratio of 20.2x Xinxiang Richful Lube Additive Co.,Ltd. (SZSE:300910) may be sending bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 30x and even P/E's higher than 53x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Xinxiang Richful Lube AdditiveLtd certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

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Does Growth Match The Low P/E?

There's an inherent assumption that a company should underperform the market for P/E ratios like Xinxiang Richful Lube AdditiveLtd's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 28% last year. The strong recent performance means it was also able to grow EPS by 150% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 9.3% each year over the next three years. With the market predicted to deliver 21% growth per year, the company is positioned for a weaker earnings result.

With this information, we can see why Xinxiang Richful Lube AdditiveLtd is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

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 Xinxiang Richful Lube AdditiveLtd maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Xinxiang Richful Lube AdditiveLtd (of which 1 is significant!) you should know about.

If you're unsure about the strength of Xinxiang Richful Lube AdditiveLtd'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.