Despite an already strong run, Shanghai Bailian (Group) Co., Ltd. (SHSE:600827) shares have been powering on, with a gain of 25% in the last thirty days. Looking further back, the 25% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Even after such a large jump in price, Shanghai Bailian (Group) may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 13x, since almost half of all companies in China have P/E ratios greater than 38x and even P/E's higher than 75x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Shanghai Bailian (Group) 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. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. 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.

How Is Shanghai Bailian (Group)'s Growth Trending?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Shanghai Bailian (Group)'s to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 46% last year. The latest three year period has also seen an excellent 80% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the lone analyst covering the company suggest earnings growth is heading into negative territory, declining 50% over the next year. Meanwhile, the broader market is forecast to expand by 38%, which paints a poor picture.

In light of this, it's understandable that Shanghai Bailian (Group)'s P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Final Word

Shares in Shanghai Bailian (Group) are going to need a lot more upward momentum to get the company's P/E out of its slump. 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 Bailian (Group) maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Shanghai Bailian (Group) (1 can't be ignored) you should be aware of.

If you're unsure about the strength of Shanghai Bailian (Group)'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.