With a price-to-earnings (or "P/E") ratio of 16.3x Shanxi Coking Co., Ltd. (SHSE:600740) may be sending bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 29x and even P/E's higher than 53x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Shanxi Coking 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 you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

How Is Shanxi Coking's Growth Trending?

Shanxi Coking's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Retrospectively, the last year delivered a frustrating 74% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 60% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 32% per annum as estimated by the two analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 24% per annum, which is noticeably less attractive.

With this information, we find it odd that Shanxi Coking is trading at a P/E lower than the market. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

The Bottom Line On Shanxi Coking's P/E

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Shanxi Coking currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Shanxi Coking (at least 1 which makes us a bit uncomfortable), and understanding these should be part of your investment process.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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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