Shanghai Carthane Co.,Ltd. (SHSE:603037) Surges 25% Yet Its Low P/E Is No Reason For Excitement

Shanghai Carthane Co.,Ltd. (SHSE:603037) shareholders have had their patience rewarded with a 25% share price jump in the last month. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

Even after such a large jump in price, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 36x, you may still consider Shanghai CarthaneLtd as an attractive investment with its 31.5x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Shanghai CarthaneLtd has been doing a good job lately as it's been growing earnings at a solid pace. It might be that many expect the respectable earnings performance to degrade substantially, which has repressed the P/E. 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 CarthaneLtd

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Shanghai CarthaneLtd's earnings, revenue and cash flow.

How Is Shanghai CarthaneLtd's Growth Trending?

Shanghai CarthaneLtd's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Retrospectively, the last year delivered an exceptional 20% gain to the company's bottom line. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

This is in contrast to the rest of the market, which is expected to grow by 40% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that Shanghai CarthaneLtd's P/E sits below the majority of other companies. 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 CarthaneLtd's P/E?

Despite Shanghai CarthaneLtd's shares building up a head of steam, its P/E still lags most other companies. 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.

We've established that Shanghai CarthaneLtd maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, 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 the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Shanghai CarthaneLtd, and understanding should be part of your investment process.

You might be able to find a better investment than Shanghai CarthaneLtd. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.