China Youran Dairy Group Limited's (HKG:9858) Subdued P/E Might Signal An Opportunity

China Youran Dairy Group Limited's (HKG:9858) price-to-earnings (or "P/E") ratio of 6.7x might make it look like a buy right now compared to the market in Hong Kong, where around half of the companies have P/E ratios above 9x and even P/E's above 19x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

China Youran Dairy Group could be doing better as it's been growing earnings less than most other companies lately. It seems that many are expecting the uninspiring earnings performance to persist, which has repressed the P/E. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

See our latest analysis for China Youran Dairy Group

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Does Growth Match The Low P/E?

There's an inherent assumption that a company should underperform the market for P/E ratios like China Youran Dairy Group's to be considered reasonable.

Retrospectively, the last year delivered a decent 6.1% gain to the company's bottom line. The solid recent performance means it was also able to grow EPS by 26% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 32% per annum during the coming three years according to the five analysts following the company. That's shaping up to be materially higher than the 16% per annum growth forecast for the broader market.

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

The Final Word

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.

Our examination of China Youran Dairy 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. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

Before you settle on your opinion, we've discovered 3 warning signs for China Youran Dairy Group (2 are a bit concerning!) that you should be aware of.

You might be able to find a better investment than China Youran Dairy Group. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (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.