China Merchants Shekou Industrial Zone Holdings Co., Ltd.'s (SZSE:001979) price-to-earnings (or "P/E") ratio of 15.5x might make it look like a buy right now compared to the market in China, where around half of the companies have P/E ratios above 27x and even P/E's above 52x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

China Merchants Shekou Industrial Zone Holdings certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, 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 China Merchants Shekou Industrial Zone Holdings' Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like China Merchants Shekou Industrial Zone Holdings' to be considered reasonable.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 15% last year. Ultimately though, it couldn't turn around the poor performance of the prior period, with EPS shrinking 72% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 21% each year during the coming three years according to the analysts following the company. Meanwhile, the rest of the market is forecast to expand by 21% per year, which is not materially different.

With this information, we find it odd that China Merchants Shekou Industrial Zone Holdings 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 Key Takeaway

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of China Merchants Shekou Industrial Zone Holdings' analyst forecasts revealed that its market-matching earnings outlook isn't contributing to its P/E as much as we would have predicted. There could be some unobserved threats to earnings preventing the P/E ratio from matching the outlook. It appears some are indeed anticipating earnings instability, because these conditions should normally provide more support to the share price.

Plus, you should also learn about these 3 warning signs we've spotted with China Merchants Shekou Industrial Zone Holdings (including 1 which can't be ignored).

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on 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.