Universal Scientific Industrial (Shanghai) Co., Ltd. (SHSE:601231) Looks Inexpensive But Perhaps Not Attractive Enough

With a price-to-earnings (or "P/E") ratio of 17.1x Universal Scientific Industrial (Shanghai) Co., Ltd. (SHSE:601231) may be sending bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 28x 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.

Universal Scientific Industrial (Shanghai) could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Check out our latest analysis for Universal Scientific Industrial (Shanghai)

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Is There Any Growth For Universal Scientific Industrial (Shanghai)?

There's an inherent assumption that a company should underperform the market for P/E ratios like Universal Scientific Industrial (Shanghai)'s to be considered reasonable.

Retrospectively, the last year delivered a frustrating 28% decrease to the company's bottom line. Regardless, EPS has managed to lift by a handy 9.6% in aggregate from three years ago, thanks to the earlier period of growth. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 19% each year during the coming three years according to the seven analysts following the company. With the market predicted to deliver 24% growth each year, the company is positioned for a weaker earnings result.

With this information, we can see why Universal Scientific Industrial (Shanghai) is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What We Can Learn From Universal Scientific Industrial (Shanghai)'s P/E?

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of Universal Scientific Industrial (Shanghai)'s analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. 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.

Before you take the next step, you should know about the 1 warning sign for Universal Scientific Industrial (Shanghai) that we have uncovered.

If you're unsure about the strength of Universal Scientific Industrial (Shanghai)'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.