With a price-to-earnings (or "P/E") ratio of 23.2x Silvery Dragon Prestressed Materials Co.,LTD Tianjin (SHSE:603969) may be sending bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 31x and even P/E's higher than 57x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
With earnings growth that's exceedingly strong of late, Silvery Dragon Prestressed MaterialsLTD Tianjin has been doing very well. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. 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.
Is There Any Growth For Silvery Dragon Prestressed MaterialsLTD Tianjin?
The only time you'd be truly comfortable seeing a P/E as low as Silvery Dragon Prestressed MaterialsLTD Tianjin's is when the company's growth is on track to lag the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 61% last year. EPS has also lifted 20% in aggregate from three years ago, mostly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing earnings over that time.
This is in contrast to the rest of the market, which is expected to grow by 38% over the next year, materially higher than the company's recent medium-term annualised growth rates.
In light of this, it's understandable that Silvery Dragon Prestressed MaterialsLTD Tianjin's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.
What We Can Learn From Silvery Dragon Prestressed MaterialsLTD Tianjin's P/E?
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.
As we suspected, our examination of Silvery Dragon Prestressed MaterialsLTD Tianjin revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.
Before you take the next step, you should know about the 2 warning signs for Silvery Dragon Prestressed MaterialsLTD Tianjin (1 is potentially serious!) that we have uncovered.
If you're unsure about the strength of Silvery Dragon Prestressed MaterialsLTD Tianjin's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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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.
