A Piece Of The Puzzle Missing From AVIC Heavy Machinery Co., Ltd.'s (SHSE:600765) Share Price

With a price-to-earnings (or "P/E") ratio of 19.4x AVIC Heavy Machinery Co., Ltd. (SHSE:600765) may be sending bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 30x and even P/E's higher than 55x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Recent times have been advantageous for AVIC Heavy Machinery as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for AVIC Heavy Machinery

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

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

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

Retrospectively, the last year delivered a decent 9.8% gain to the company's bottom line. The latest three year period has also seen an excellent 239% overall rise in EPS, aided somewhat by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 19% each year over the next three years. Meanwhile, the rest of the market is forecast to expand by 21% per annum, which is not materially different.

In light of this, it's peculiar that AVIC Heavy Machinery's P/E sits below the majority of other companies. It may be that most investors are not convinced the company can achieve future growth expectations.

What We Can Learn From AVIC Heavy Machinery's P/E?

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that AVIC Heavy Machinery currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. There could be some unobserved threats to earnings preventing the P/E ratio from matching the outlook. It appears some are indeed anticipating earnings instability, because these conditions should normally provide more support to the share price.

You need to take note of risks, for example - AVIC Heavy Machinery has 2 warning signs (and 1 which can't be ignored) we think you should know about.

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.