Henan Shenhuo Coal Industry and Electricity Power Co. Ltd's (SZSE:000933) price-to-earnings (or "P/E") ratio of 7x might make it look like a strong buy right now compared to the market in China, where around half of the companies have P/E ratios above 28x and even P/E's above 52x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

Henan Shenhuo Coal Industry and Electricity Power could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. 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 Henan Shenhuo Coal Industry and Electricity Power?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Henan Shenhuo Coal Industry and Electricity Power's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 24% decrease to the company's bottom line. Even so, admirably EPS has lifted 432% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the eight analysts covering the company suggest earnings should grow by 7.7% per annum over the next three years. Meanwhile, the rest of the market is forecast to expand by 24% per year, which is noticeably more attractive.

In light of this, it's understandable that Henan Shenhuo Coal Industry and Electricity Power'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

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Henan Shenhuo Coal Industry and Electricity Power 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Having said that, be aware Henan Shenhuo Coal Industry and Electricity Power is showing 1 warning sign in our investment analysis, you should know about.

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).

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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.

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