Shanghai Lianming Machinery Co., Ltd. (SHSE:603006) Surges 35% Yet Its Low P/E Is No Reason For Excitement

Those holding Shanghai Lianming Machinery Co., Ltd. (SHSE:603006) shares would be relieved that the share price has rebounded 35% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 4.6% in the last twelve months.

Even after such a large jump in price, Shanghai Lianming Machinery may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 15.7x, since almost half of all companies in China have P/E ratios greater than 30x and even P/E's higher than 55x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

The earnings growth achieved at Shanghai Lianming Machinery over the last year would be more than acceptable for most companies. One possibility is that the P/E is low because investors think this respectable earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

View our latest analysis for Shanghai Lianming Machinery

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Is There Any Growth For Shanghai Lianming Machinery?

The only time you'd be truly comfortable seeing a P/E as low as Shanghai Lianming Machinery's is when the company's growth is on track to lag the market.

Retrospectively, the last year delivered an exceptional 20% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 47% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 41% shows it's noticeably less attractive on an annualised basis.

With this information, we can see why Shanghai Lianming Machinery is trading at a P/E lower than the market. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

What We Can Learn From Shanghai Lianming Machinery's P/E?

Shanghai Lianming Machinery's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. 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 Lianming Machinery maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

You always need to take note of risks, for example - Shanghai Lianming Machinery has 1 warning sign we think you should be aware of.

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.