Shanxi Coal International Energy Group Co.,Ltd's (SHSE:600546) Prospects Need A Boost To Lift Shares

Shanxi Coal International Energy Group Co.,Ltd's (SHSE:600546) price-to-earnings (or "P/E") ratio of 9.2x might make it look like a strong buy right now compared to the market in China, where around half of the companies have P/E ratios above 38x and even P/E's above 73x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Shanxi Coal International Energy GroupLtd has been struggling lately as its earnings have declined faster than most other companies. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. You'd much rather the company wasn't bleeding earnings if you still believe in the business. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.

See our latest analysis for Shanxi Coal International Energy GroupLtd

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Shanxi Coal International Energy GroupLtd.

How Is Shanxi Coal International Energy GroupLtd's Growth Trending?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Shanxi Coal International Energy GroupLtd's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 58%. Regardless, EPS has managed to lift by a handy 22% in aggregate from three years ago, thanks to the earlier period of growth. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 30% over the next year. With the market predicted to deliver 37% growth , the company is positioned for a weaker earnings result.

With this information, we can see why Shanxi Coal International Energy GroupLtd is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Final Word

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.

As we suspected, our examination of Shanxi Coal International Energy GroupLtd's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these 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 2 warning signs with Shanxi Coal International Energy GroupLtd, and understanding them should be part of your investment process.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.