Investors Continue Waiting On Sidelines For Shanghai Baolong Automotive Corporation (SHSE:603197)

When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 29x, you may consider Shanghai Baolong Automotive Corporation (SHSE:603197) as an attractive investment with its 19.4x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

With earnings growth that's superior to most other companies of late, Shanghai Baolong Automotive has been doing relatively well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. 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.

Check out our latest analysis for Shanghai Baolong Automotive

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Is There Any Growth For Shanghai Baolong Automotive?

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

If we review the last year of earnings growth, the company posted a terrific increase of 31%. The latest three year period has also seen a 22% overall rise in EPS, aided extensively by its short-term performance. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Shifting to the future, estimates from the nine analysts covering the company suggest earnings should grow by 31% per annum over the next three years. Meanwhile, the rest of the market is forecast to only expand by 24% each year, which is noticeably less attractive.

In light of this, it's peculiar that Shanghai Baolong Automotive's P/E sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Final Word

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Shanghai Baolong Automotive currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Shanghai Baolong Automotive (at least 1 which is concerning), and understanding them should be part of your investment process.

Of course, you might also be able to find a better stock than Shanghai Baolong Automotive. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com