When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 33x, you may consider Shanghai Zhonggu Logistics Co., Ltd. (SHSE:603565) as a highly attractive investment with its 12.5x 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.

Shanghai Zhonggu Logistics could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Is There Any Growth For Shanghai Zhonggu Logistics?

Shanghai Zhonggu Logistics' P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 45%. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 9.7% in total. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.

Turning to the outlook, the next three years should generate growth of 6.1% per year as estimated by the three analysts watching the company. That's shaping up to be materially lower than the 26% each year growth forecast for the broader market.

With this information, we can see why Shanghai Zhonggu Logistics is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Key Takeaway

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 Shanghai Zhonggu Logistics' analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Shanghai Zhonggu Logistics (2 are significant) you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on 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.