Jiangxi Hongcheng Environment Co.,Ltd.'s (SHSE:600461) Shares Lagging The Market But So Is The Business

Jiangxi Hongcheng Environment Co.,Ltd.'s (SHSE:600461) price-to-earnings (or "P/E") ratio of 12.9x 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 53x 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.

Recent times have been advantageous for Jiangxi Hongcheng EnvironmentLtd as its earnings have been rising faster than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Jiangxi Hongcheng EnvironmentLtd

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

Does Growth Match The Low P/E?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Jiangxi Hongcheng EnvironmentLtd's to be considered reasonable.

If we review the last year of earnings growth, the company posted a worthy increase of 6.4%. EPS has also lifted 19% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 4.3% per annum as estimated by the only analyst watching the company. That's shaping up to be materially lower than the 24% per annum growth forecast for the broader market.

With this information, we can see why Jiangxi Hongcheng EnvironmentLtd 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.

The Bottom Line On Jiangxi Hongcheng EnvironmentLtd's P/E

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Jiangxi Hongcheng EnvironmentLtd's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Jiangxi Hongcheng EnvironmentLtd that you should be aware of.

If you're unsure about the strength of Jiangxi Hongcheng EnvironmentLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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.