Shanghai MicroPort Endovascular MedTech Co., Ltd.'s (SHSE:688016) price-to-earnings (or "P/E") ratio of 26.2x might make it look like a buy right now compared to the market in China, where around half of the companies have P/E ratios above 33x and even P/E's above 61x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Shanghai MicroPort Endovascular MedTech certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. 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.

How Is Shanghai MicroPort Endovascular MedTech's Growth Trending?

Shanghai MicroPort Endovascular MedTech's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

If we review the last year of earnings growth, the company posted a terrific increase of 48%. The latest three year period has also seen an excellent 87% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the ten analysts covering the company suggest earnings should grow by 18% each year over the next three years. 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 MicroPort Endovascular MedTech 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

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 Shanghai MicroPort Endovascular MedTech maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

You always need to take note of risks, for example - Shanghai MicroPort Endovascular MedTech has 2 warning signs we think you should be aware of.

Of course, you might also be able to find a better stock than Shanghai MicroPort Endovascular MedTech. 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.