With a price-to-earnings (or "P/E") ratio of 6.3x Yue Yuen Industrial (Holdings) Limited (HKG:551) may be sending bullish signals at the moment, given that almost half of all companies in Hong Kong have P/E ratios greater than 12x and even P/E's higher than 22x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

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Yue Yuen Industrial (Holdings) certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for Yue Yuen Industrial (Holdings)

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What Are Growth Metrics Telling Us About The Low P/E?

The only time you'd be truly comfortable seeing a P/E as low as Yue Yuen Industrial (Holdings)'s is when the company's growth is on track to lag the market.

Retrospectively, the last year delivered an exceptional 43% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 242% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 6.4% per year as estimated by the analysts watching the company. With the market predicted to deliver 14% growth per annum, the company is positioned for a weaker earnings result.

With this information, we can see why Yue Yuen Industrial (Holdings) 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 Final Word

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 Yue Yuen Industrial (Holdings) maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

It is also worth noting that we have found 1 warning sign for Yue Yuen Industrial (Holdings) that you need to take into consideration.

If you're unsure about the strength of Yue Yuen Industrial (Holdings)'s business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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