Investors Continue Waiting On Sidelines For MLS Co., Ltd. (SZSE:002745)

MLS Co., Ltd.'s (SZSE:002745) price-to-earnings (or "P/E") ratio of 28.8x might make it look like a buy right now compared to the market in China, where around half of the companies have P/E ratios above 36x and even P/E's above 71x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Recent times have been pleasing for MLS as its earnings have risen in spite of the market's earnings going into reverse. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, 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.

See our latest analysis for MLS

If you'd like to see what analysts are forecasting going forward, you should check out our free report on MLS.

Does Growth Match The Low P/E?

In order to justify its P/E ratio, MLS would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered an exceptional 189% gain to the company's bottom line. Still, incredibly EPS has fallen 18% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 83% during the coming year according to the two analysts following the company. That's shaping up to be materially higher than the 38% growth forecast for the broader market.

In light of this, it's peculiar that MLS' P/E sits below the majority of other companies. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

The Bottom Line On MLS' P/E

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 MLS 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.

Having said that, be aware MLS is showing 1 warning sign in our investment analysis, you should know about.

If these risks are making you reconsider your opinion on MLS, explore our interactive list of high quality stocks to get an idea of what else is out there.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.