With a price-to-earnings (or "P/E") ratio of 18.9x Suzhou Alton Electrical & Mechanical Industry Co., Ltd. (SZSE:301187) may be sending bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 33x and even P/E's higher than 61x 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 limited.
Recent times have been advantageous for Suzhou Alton Electrical & Mechanical Industry as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
How Is Suzhou Alton Electrical & Mechanical Industry's Growth Trending?
There's an inherent assumption that a company should underperform the market for P/E ratios like Suzhou Alton Electrical & Mechanical Industry's to be considered reasonable.
Taking a look back first, we see that the company grew earnings per share by an impressive 51% last year. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.
Looking ahead now, EPS is anticipated to climb by 14% per annum during the coming three years according to the two analysts following the company. That's shaping up to be materially lower than the 26% each year growth forecast for the broader market.
In light of this, it's understandable that Suzhou Alton Electrical & Mechanical Industry's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.
The Final Word
We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
We've established that Suzhou Alton Electrical & Mechanical Industry 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 should always think about risks. Case in point, we've spotted 2 warning signs for Suzhou Alton Electrical & Mechanical Industry you should be aware of, and 1 of them can't be ignored.
If these risks are making you reconsider your opinion on Suzhou Alton Electrical & Mechanical Industry, explore our interactive list of high quality stocks to get an idea of what else is out there.
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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.