When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 28x, you may consider Shanghai Sheng Jian Environment Technology Co., Ltd. (SHSE:603324) as an attractive investment with its 23x P/E ratio. 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 Shanghai Sheng Jian Environment Technology 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 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 Shanghai Sheng Jian Environment Technology?

There's an inherent assumption that a company should underperform the market for P/E ratios like Shanghai Sheng Jian Environment Technology's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 25% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 2.9% drop in EPS in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next three years should generate growth of 25% each year as estimated by the only analyst watching the company. Meanwhile, the rest of the market is forecast to expand by 24% per annum, which is not materially different.

With this information, we find it odd that Shanghai Sheng Jian Environment Technology is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting lower selling prices.

The Bottom Line On Shanghai Sheng Jian Environment Technology's P/E

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.

We've established that Shanghai Sheng Jian Environment Technology currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. When we see an average earnings outlook with market-like growth, we assume potential risks are what might be placing pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because these conditions should normally provide more support to the share price.

Having said that, be aware Shanghai Sheng Jian Environment Technology is showing 3 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable.

Of course, you might also be able to find a better stock than Shanghai Sheng Jian Environment Technology. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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.