When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 37x, you may consider Shaanxi Construction Engineering Group Corporation Limited (SHSE:600248) as a highly attractive investment with its 4.3x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.
With its earnings growth in positive territory compared to the declining earnings of most other companies, Shaanxi Construction Engineering Group has been doing quite well of late. 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 Shaanxi Construction Engineering Group's Growth Trending?
The only time you'd be truly comfortable seeing a P/E as depressed as Shaanxi Construction Engineering Group's is when the company's growth is on track to lag the market decidedly.
If we review the last year of earnings growth, the company posted a worthy increase of 8.8%. However, this wasn't enough as the latest three year period has seen an unpleasant 27% overall drop in EPS. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
Shifting to the future, estimates from the only analyst covering the company suggest earnings should grow by 17% over the next year. Meanwhile, the rest of the market is forecast to expand by 38%, which is noticeably more attractive.
In light of this, it's understandable that Shaanxi Construction Engineering Group's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.
The Bottom Line On Shaanxi Construction Engineering Group's P/E
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.
We've established that Shaanxi Construction Engineering Group 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.
And what about other risks? Every company has them, and we've spotted 3 warning signs for Shaanxi Construction Engineering Group (of which 2 shouldn't be ignored!) you should know about.
Of course, you might also be able to find a better stock than Shaanxi Construction Engineering Group. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
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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.
