Little Excitement Around China Medical System Holdings Limited's (HKG:867) Earnings

China Medical System Holdings Limited's (HKG:867) price-to-earnings (or "P/E") ratio of 6.1x 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 10x and even P/E's above 19x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

China Medical System Holdings hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It seems that many are expecting the dour 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 Medical System Holdings

If you'd like to see what analysts are forecasting going forward, you should check out our free report on China Medical System Holdings.

Does Growth Match The Low P/E?

The only time you'd be truly comfortable seeing a P/E as low as China Medical System Holdings' 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 26%. As a result, earnings from three years ago have also fallen 3.9% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 5.1% each year during the coming three years according to the eight analysts following the company. With the market predicted to deliver 16% growth per year, the company is positioned for a weaker earnings result.

In light of this, it's understandable that China Medical System Holdings' P/E sits below the majority of other companies. 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 China Medical System Holdings' 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.

We've established that China Medical System Holdings 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. It's hard to see the share price rising strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 1 warning sign for China Medical System Holdings you should be aware of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.

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