With a price-to-earnings (or "P/E") ratio of 13.7x Shenzhen Gas Corporation Ltd. (SHSE:601139) may be sending very bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 35x and even P/E's higher than 63x 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 so limited.
Shenzhen Gas certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. If you 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.
View our latest analysis for Shenzhen Gas
Does Growth Match The Low P/E?
The only time you'd be truly comfortable seeing a P/E as depressed as Shenzhen Gas' is when the company's growth is on track to lag the market decidedly.
Taking a look back first, we see that the company grew earnings per share by an impressive 42% last year. The latest three year period has also seen a 19% overall rise in EPS, aided extensively by its short-term performance. So we can start by confirming that the company has actually done a good job of growing earnings over that time.
Looking ahead now, EPS is anticipated to climb by 23% during the coming year according to the seven analysts following the company. Meanwhile, the rest of the market is forecast to expand by 44%, which is noticeably more attractive.
With this information, we can see why Shenzhen Gas 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.
What We Can Learn From Shenzhen Gas' P/E?
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.
We've established that Shenzhen Gas 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. It's hard to see the share price rising strongly in the near future under these circumstances.
And what about other risks? Every company has them, and we've spotted 2 warning signs for Shenzhen Gas (of which 1 is significant!) you should know about.
It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.
