With a median price-to-earnings (or "P/E") ratio of close to 9x in Hong Kong, you could be forgiven for feeling indifferent about China Shenhua Energy Company Limited's (HKG:1088) P/E ratio of 7.2x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

China Shenhua Energy has been struggling lately as its earnings have declined faster than most other companies. It might be that many expect the dismal earnings performance to revert back to market averages soon, which has kept the P/E from falling. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. Or at the very least, you'd be hoping it doesn't keep underperforming if your plan is to pick up some stock while it's not in favour.

Check out our latest analysis for China Shenhua Energy

Does Growth Match The P/E?

In order to justify its P/E ratio, China Shenhua Energy would need to produce growth that's similar to the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 14%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 65% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Looking ahead now, EPS is anticipated to slump, contracting by 3.2% during the coming year according to the analysts following the company. With the market predicted to deliver 23% growth , that's a disappointing outcome.

In light of this, it's somewhat alarming that China Shenhua Energy's P/E sits in line with the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh on the share price eventually.

The Bottom Line On China Shenhua Energy's P/E

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.

We've established that China Shenhua Energy currently trades on a higher than expected P/E for a company whose earnings are forecast to decline. Right now we are uncomfortable with the P/E as the predicted future earnings are unlikely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

And what about other risks? Every company has them, and we've spotted 2 warning signs for China Shenhua Energy (of which 1 is concerning!) you should know about.

Of course, you might also be able to find a better stock than China Shenhua Energy. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.