Eastern Air Logistics Co., Ltd.'s (SHSE:601156) Subdued P/E Might Signal An Opportunity

Eastern Air Logistics Co., Ltd.'s (SHSE:601156) price-to-earnings (or "P/E") ratio of 10.1x might make it look like a strong buy right now compared to the market in China, where around half of the companies have P/E ratios above 28x and even P/E's above 52x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Eastern Air Logistics has been struggling lately as its earnings have declined faster than most other companies. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. You'd much rather the company wasn't bleeding earnings if you still believe in the business. 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.

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Does Growth Match The Low P/E?

The only time you'd be truly comfortable seeing a P/E as depressed as Eastern Air Logistics' is when the company's growth is on track to lag the market decidedly.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 10%. As a result, earnings from three years ago have also fallen 14% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to climb by 21% per annum during the coming three years according to the seven analysts following the company. Meanwhile, the rest of the market is forecast to expand by 23% per annum, which is not materially different.

In light of this, it's peculiar that Eastern Air Logistics' P/E sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting lower selling prices.

What We Can Learn From Eastern Air Logistics' P/E?

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Eastern Air Logistics currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. There could be some unobserved threats to earnings preventing the P/E ratio from matching the outlook. It appears some are indeed anticipating earnings instability, because these conditions should normally provide more support to the share price.

Many other vital risk factors can be found on the company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Eastern Air Logistics with six simple checks.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.