Even With A 26% Surge, Cautious Investors Are Not Rewarding Sany Heavy Industry Co.,Ltd's (SHSE:600031) Performance Completely

Sany Heavy Industry Co.,Ltd (SHSE:600031) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 42% in the last year.

In spite of the firm bounce in price, Sany Heavy IndustryLtd's price-to-earnings (or "P/E") ratio of 31.3x might still make it look like a buy right now compared to the market in China, where around half of the companies have P/E ratios above 39x and even P/E's above 77x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Sany Heavy IndustryLtd 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 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 Sany Heavy IndustryLtd

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Sany Heavy IndustryLtd.

What Are Growth Metrics Telling Us About The Low P/E?

There's an inherent assumption that a company should underperform the market for P/E ratios like Sany Heavy IndustryLtd's to be considered reasonable.

Retrospectively, the last year delivered a decent 12% gain to the company's bottom line. Ultimately though, it couldn't turn around the poor performance of the prior period, with EPS shrinking 66% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 41% over the next year. With the market only predicted to deliver 37%, the company is positioned for a stronger earnings result.

With this information, we find it odd that Sany Heavy IndustryLtd is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Bottom Line On Sany Heavy IndustryLtd's P/E

The latest share price surge wasn't enough to lift Sany Heavy IndustryLtd's P/E close to the market median. 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.

Our examination of Sany Heavy IndustryLtd's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Sany Heavy IndustryLtd that 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.