When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 29x, you may consider Shanghai Construction Group Co., Ltd. (SHSE:600170) as a highly attractive investment with its 12.1x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

While the market has experienced earnings growth lately, Shanghai Construction Group's earnings have gone into reverse gear, which is not great. 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.

Is There Any Growth For Shanghai Construction Group?

Shanghai Construction Group's P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 1.6%. The last three years don't look nice either as the company has shrunk EPS by 48% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 28% per annum over the next three years. That's shaping up to be materially higher than the 24% per annum growth forecast for the broader market.

In light of this, it's peculiar that Shanghai Construction Group's P/E sits below the majority of other companies. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

The Key Takeaway

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of Shanghai Construction 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. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Shanghai Construction Group, and understanding should be part of your investment process.

If these risks are making you reconsider your opinion on Shanghai Construction Group, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com