There's No Escaping Avary Holding(Shenzhen)Co., Limited's (SZSE:002938) Muted Earnings

When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 36x, you may consider Avary Holding(Shenzhen)Co., Limited (SZSE:002938) as an attractive investment with its 24.7x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Avary Holding(Shenzhen)Co has been struggling lately as its earnings have declined faster than most other companies. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.

View our latest analysis for Avary Holding(Shenzhen)Co

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Avary Holding(Shenzhen)Co.

Does Growth Match The Low P/E?

The only time you'd be truly comfortable seeing a P/E as low as Avary Holding(Shenzhen)Co's is when the company's growth is on track to lag the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 4.6%. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 10.0% in total. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.

Looking ahead now, EPS is anticipated to climb by 25% during the coming year according to the nine analysts following the company. With the market predicted to deliver 38% growth , the company is positioned for a weaker earnings result.

With this information, we can see why Avary Holding(Shenzhen)Co is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

What We Can Learn From Avary Holding(Shenzhen)Co's 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 Avary Holding(Shenzhen)Co 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

You should always think about risks. Case in point, we've spotted 1 warning sign for Avary Holding(Shenzhen)Co you should be aware of.

Of course, you might also be able to find a better stock than Avary Holding(Shenzhen)Co. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.