Shanghai Zhenhua Heavy Industries Co., Ltd.'s (SHSE:600320) P/E Is On The Mark

Shanghai Zhenhua Heavy Industries Co., Ltd.'s (SHSE:600320) price-to-earnings (or "P/E") ratio of 37.4x might make it look like a sell right now compared to the market in China, where around half of the companies have P/E ratios below 32x and even P/E's below 19x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Recent times have been advantageous for Shanghai Zhenhua Heavy Industries as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Shanghai Zhenhua Heavy Industries

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Does Growth Match The High P/E?

There's an inherent assumption that a company should outperform the market for P/E ratios like Shanghai Zhenhua Heavy Industries' to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 43% last year. As a result, it also grew EPS by 23% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 43% per year as estimated by the only analyst watching the company. With the market only predicted to deliver 24% each year, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Shanghai Zhenhua Heavy Industries' P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From Shanghai Zhenhua Heavy Industries' 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.

As we suspected, our examination of Shanghai Zhenhua Heavy Industries' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

Before you take the next step, you should know about the 3 warning signs for Shanghai Zhenhua Heavy Industries (1 is potentially serious!) that we have uncovered.

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.