Despite an already strong run, Shandong Xinchao Energy Corporation Limited (SHSE:600777) shares have been powering on, with a gain of 27% in the last thirty days. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 9.3% in the last twelve months.

Although its price has surged higher, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 37x, you may still consider Shandong Xinchao Energy as a highly attractive investment with its 6.7x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

We'd have to say that with no tangible growth over the last year, Shandong Xinchao Energy's earnings have been unimpressive. One possibility is that the P/E is low because investors think this benign earnings growth rate will likely underperform the broader market in the near future. If not, then existing shareholders may be feeling optimistic about the future direction of the share price.

Is There Any Growth For Shandong Xinchao Energy?

The only time you'd be truly comfortable seeing a P/E as depressed as Shandong Xinchao Energy's is when the company's growth is on track to lag the market decidedly.

If we review the last year of earnings, the company posted a result that saw barely any deviation from a year ago. Likewise, not much has changed from three years ago as earnings have been stuck during that whole time. Therefore, it's fair to say that earnings growth has definitely eluded the company recently.

This is in contrast to the rest of the market, which is expected to grow by 41% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why Shandong Xinchao Energy is trading at a P/E lower than the market. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Key Takeaway

Shares in Shandong Xinchao Energy are going to need a lot more upward momentum to get the company's P/E out of its slump. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Shandong Xinchao Energy revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for Shandong Xinchao Energy with six simple checks.

If these risks are making you reconsider your opinion on Shandong Xinchao Energy, 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.