When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 30x, you may consider SINOMACH HEAVY EQUIPMENT GROUP CO.,LTD (SHSE:601399) as a stock to potentially avoid with its 44.4x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.
Earnings have risen at a steady rate over the last year for SINOMACH HEAVY EQUIPMENT GROUPLTD, which is generally not a bad outcome. One possibility is that the P/E is high because investors think this good earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
Check out our latest analysis for SINOMACH HEAVY EQUIPMENT GROUPLTD
Is There Enough Growth For SINOMACH HEAVY EQUIPMENT GROUPLTD?
In order to justify its P/E ratio, SINOMACH HEAVY EQUIPMENT GROUPLTD would need to produce impressive growth in excess of the market.
Taking a look back first, we see that the company managed to grow earnings per share by a handy 6.0% last year. Ultimately though, it couldn't turn around the poor performance of the prior period, with EPS shrinking 3.0% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
In contrast to the company, the rest of the market is expected to grow by 42% over the next year, which really puts the company's recent medium-term earnings decline into perspective.
With this information, we find it concerning that SINOMACH HEAVY EQUIPMENT GROUPLTD is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.
The Key Takeaway
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.
Our examination of SINOMACH HEAVY EQUIPMENT GROUPLTD revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.
Having said that, be aware SINOMACH HEAVY EQUIPMENT GROUPLTD is showing 1 warning sign in our investment analysis, you should know about.
If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
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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.