Investors Holding Back On AVIC Heavy Machinery Co., Ltd. (SHSE:600765)
With a price-to-earnings (or "P/E") ratio of 23.4x 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 37x and even P/E's higher than 71x 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.
The recently shrinking earnings for AVIC Heavy Machinery have been in line with the market. It might be that many expect the company's earnings performance to degrade further, which has repressed the P/E. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. At the very least, you'd be hoping that earnings don't fall off a cliff if your plan is to pick up some stock while it's out of favour.
See our latest analysis for AVIC Heavy Machinery
Keen to find out how analysts think AVIC Heavy Machinery's future stacks up against the industry? In that case, our free report is a great place to start.Is There Any Growth For AVIC Heavy Machinery?
In order to justify its P/E ratio, AVIC Heavy Machinery would need to produce sluggish growth that's trailing the market.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 2.2%. Even so, admirably EPS has lifted 77% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.
Turning to the outlook, the next year should generate growth of 44% as estimated by the six analysts watching the company. With the market only predicted to deliver 38%, the company is positioned for a stronger earnings result.
With this information, we find it odd that AVIC Heavy Machinery 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 Key Takeaway
Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
Our examination of AVIC Heavy Machinery'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. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.
There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for AVIC Heavy Machinery that you should be aware of.
You might be able to find a better investment than AVIC Heavy 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.
About SHSE:600765
AVIC Heavy Machinery
Engages in forging, casting, hydraulic environmental and other business in China.
Undervalued with excellent balance sheet.