Lacklustre Performance Is Driving Shanghai Tunnel Engineering Co., Ltd.'s (SHSE:600820) Low P/E

When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 27x, you may consider Shanghai Tunnel Engineering Co., Ltd. (SHSE:600820) as a highly attractive investment with its 5.9x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

With earnings that are retreating more than the market's of late, Shanghai Tunnel Engineering has been very sluggish. It seems that many are expecting the dismal earnings performance to persist, 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. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.

See our latest analysis for Shanghai Tunnel Engineering

Keen to find out how analysts think Shanghai Tunnel Engineering's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Shanghai Tunnel Engineering's Growth Trending?

In order to justify its P/E ratio, Shanghai Tunnel Engineering would need to produce anemic growth that's substantially 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 6.4%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 19% overall rise in EPS. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the seven analysts covering the company suggest earnings should grow by 9.2% per year over the next three years. That's shaping up to be materially lower than the 19% per year growth forecast for the broader market.

In light of this, it's understandable that Shanghai Tunnel Engineering's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Bottom Line On Shanghai Tunnel Engineering's P/E

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.

As we suspected, our examination of Shanghai Tunnel Engineering's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Shanghai Tunnel Engineering (at least 1 which is significant), and understanding these should be part of your investment process.

If you're unsure about the strength of Shanghai Tunnel Engineering's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.