Market Cool On Hunan Aihua Group Co., Ltd's (SHSE:603989) Earnings

With a price-to-earnings (or "P/E") ratio of 15.9x Hunan Aihua Group Co., Ltd (SHSE:603989) 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.

Hunan Aihua Group could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Check out our latest analysis for Hunan Aihua Group

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

Does Growth Match The Low P/E?

Hunan Aihua Group's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 30%. The last three years don't look nice either as the company has shrunk EPS by 32% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the sole analyst covering the company suggest earnings should grow by 91% over the next year. With the market only predicted to deliver 36%, the company is positioned for a stronger earnings result.

With this information, we find it odd that Hunan Aihua Group is trading at a P/E lower than the market. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

What We Can Learn From Hunan Aihua Group's P/E?

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.

Our examination of Hunan Aihua Group's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. 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.

Before you settle on your opinion, we've discovered 2 warning signs for Hunan Aihua Group that you should be aware of.

You might be able to find a better investment than Hunan Aihua 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.