With a price-to-earnings (or "P/E") ratio of 14.6x Shinva Medical Instrument Co.,Ltd. (SHSE:600587) may be sending very bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 36x and even P/E's higher than 69x are not unusual. 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.

Shinva Medical InstrumentLtd 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 not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Is There Any Growth For Shinva Medical InstrumentLtd?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Shinva Medical InstrumentLtd's to be considered reasonable.

Retrospectively, the last year delivered a decent 8.1% gain to the company's bottom line. The solid recent performance means it was also able to grow EPS by 29% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Shifting to the future, estimates from the two analysts covering the company suggest earnings should grow by 23% 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 Shinva Medical InstrumentLtd'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 Final Word

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Shinva Medical InstrumentLtd's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Shinva Medical InstrumentLtd you should know about.

If you're unsure about the strength of Shinva Medical InstrumentLtd'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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