When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 31x, you may consider SINOMACH HEAVY EQUIPMENT GROUP CO.,LTD (SHSE:601399) as a stock to potentially avoid with its 44.7x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

The earnings growth achieved at SINOMACH HEAVY EQUIPMENT GROUPLTD over the last year would be more than acceptable for most companies. One possibility is that the P/E is high because investors think this respectable 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.

Is There Enough Growth For SINOMACH HEAVY EQUIPMENT GROUPLTD?

The only time you'd be truly comfortable seeing a P/E as high as SINOMACH HEAVY EQUIPMENT GROUPLTD's is when the company's growth is on track to outshine the market.

If we review the last year of earnings growth, the company posted a worthy increase of 12%. The solid recent performance means it was also able to grow EPS by 13% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Comparing that to the market, which is predicted to deliver 38% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

With this information, we find it concerning that SINOMACH HEAVY EQUIPMENT GROUPLTD is trading at a P/E higher than the market. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

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.

Our examination of SINOMACH HEAVY EQUIPMENT GROUPLTD revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. When we see weak earnings with slower than market growth, 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.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for SINOMACH HEAVY EQUIPMENT GROUPLTD with six simple checks on some of these key factors.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.