Investors Still Waiting For A Pull Back In China Animal Husbandry Industry Co., Ltd. (SHSE:600195)

With a price-to-earnings (or "P/E") ratio of 37.5x China Animal Husbandry Industry Co., Ltd. (SHSE:600195) may be sending bearish signals at the moment, given that almost half of all companies in China have P/E ratios under 33x and even P/E's lower than 20x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Recent times haven't been advantageous for China Animal Husbandry Industry as its earnings have been falling quicker than most other companies. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for China Animal Husbandry Industry

Keen to find out how analysts think China Animal Husbandry Industry's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Growth For China Animal Husbandry Industry?

In order to justify its P/E ratio, China Animal Husbandry Industry would need to produce impressive growth in excess of the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 65%. The last three years don't look nice either as the company has shrunk EPS by 49% in aggregate. 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 three years should generate growth of 48% per year as estimated by the eight analysts watching the company. That's shaping up to be materially higher than the 19% per year growth forecast for the broader market.

In light of this, it's understandable that China Animal Husbandry Industry's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of China Animal Husbandry Industry's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Having said that, be aware China Animal Husbandry Industry is showing 2 warning signs in our investment analysis, you should know about.

You might be able to find a better investment than China Animal Husbandry Industry. 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.