When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 33x, you may consider Shanghai Jinqiao Export Processing Zone Development Co.,Ltd (SHSE:600639) as a highly attractive investment with its 5.1x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.
The recent earnings growth at Shanghai Jinqiao Export Processing Zone DevelopmentLtd would have to be considered satisfactory if not spectacular. One possibility is that the P/E is low because investors think this good earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders may have reason to be optimistic about the future direction of the share price.
View our latest analysis for Shanghai Jinqiao Export Processing Zone DevelopmentLtd
Does Growth Match The Low P/E?
There's an inherent assumption that a company should far underperform the market for P/E ratios like Shanghai Jinqiao Export Processing Zone DevelopmentLtd's to be considered reasonable.
Taking a look back first, we see that the company managed to grow earnings per share by a handy 2.7% last year. Pleasingly, EPS has also lifted 82% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.
Comparing that to the market, which is predicted to deliver 43% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.
With this information, we can see why Shanghai Jinqiao Export Processing Zone DevelopmentLtd 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
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.
As we suspected, our examination of Shanghai Jinqiao Export Processing Zone DevelopmentLtd 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. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.
Plus, you should also learn about these 3 warning signs we've spotted with Shanghai Jinqiao Export Processing Zone DevelopmentLtd (including 2 which can't be ignored).
You might be able to find a better investment than Shanghai Jinqiao Export Processing Zone DevelopmentLtd. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).
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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.