Why Investors Shouldn't Be Surprised By Changqing Machinery Company Limited's (SHSE:603768) Low P/E

When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 30x, you may consider Changqing Machinery Company Limited (SHSE:603768) as an attractive investment with its 22.1x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Changqing Machinery certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. 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.

View our latest analysis for Changqing Machinery

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 Changqing Machinery's earnings, revenue and cash flow.

Is There Any Growth For Changqing Machinery?

In order to justify its P/E ratio, Changqing Machinery would need to produce sluggish growth that's trailing the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 129% last year. Pleasingly, EPS has also lifted 109% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

This is in contrast to the rest of the market, which is expected to grow by 41% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why Changqing Machinery is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

The Bottom Line On Changqing Machinery's P/E

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Changqing Machinery 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. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 3 warning signs for Changqing Machinery you should be aware of, and 2 of them are a bit concerning.

You might be able to find a better investment than Changqing Machinery. 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.