Benign Growth For Yinchuan Xinhua Commercial (Group) Co., Ltd. (SHSE:600785) Underpins Stock's 28% Plummet

Yinchuan Xinhua Commercial (Group) Co., Ltd. (SHSE:600785) shareholders won't be pleased to see that the share price has had a very rough month, dropping 28% and undoing the prior period's positive performance. The recent drop has obliterated the annual return, with the share price now down 8.8% over that longer period.

Following the heavy fall in price, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 32x, you may consider Yinchuan Xinhua Commercial (Group) as an attractive investment with its 24.7x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Yinchuan Xinhua Commercial (Group)'s earnings growth of late has been pretty similar to most other companies. It might be that many expect the mediocre earnings performance to degrade, which has repressed the P/E. If not, then existing shareholders have reason to be optimistic about the future direction of the share price.

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Does Growth Match The Low P/E?

The only time you'd be truly comfortable seeing a P/E as low as Yinchuan Xinhua Commercial (Group)'s is when the company's growth is on track to lag the market.

If we review the last year of earnings, the company posted a result that saw barely any deviation from a year ago. However, a few strong years before that means that it was still able to grow EPS by an impressive 250% 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.

Looking ahead now, EPS is anticipated to climb by 11% per year during the coming three years according to the sole analyst following the company. That's shaping up to be materially lower than the 26% each year growth forecast for the broader market.

In light of this, it's understandable that Yinchuan Xinhua Commercial (Group)'s P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Bottom Line On Yinchuan Xinhua Commercial (Group)'s P/E

Yinchuan Xinhua Commercial (Group)'s P/E has taken a tumble along with its share price. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Yinchuan Xinhua Commercial (Group) maintains its low P/E on the weakness of its forecast growth being lower than the wider market, 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. It's hard to see the share price rising strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 1 warning sign for Yinchuan Xinhua Commercial (Group) you should be aware of.

You might be able to find a better investment than Yinchuan Xinhua Commercial (Group). 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.