Investors Aren't Buying Shanghai Mechanical & Electrical Industry Co.,Ltd.'s (SHSE:600835) Earnings

When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 28x, you may consider Shanghai Mechanical & Electrical Industry Co.,Ltd. (SHSE:600835) as a highly attractive investment with its 11.6x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

While the market has experienced earnings growth lately, Shanghai Mechanical & Electrical IndustryLtd's earnings have gone into reverse gear, which is not great. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

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Does Growth Match The Low P/E?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Shanghai Mechanical & Electrical IndustryLtd's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 7.1%. The last three years don't look nice either as the company has shrunk EPS by 24% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to climb by 16% per annum during the coming three years according to the lone analyst following the company. Meanwhile, the rest of the market is forecast to expand by 24% each year, which is noticeably more attractive.

With this information, we can see why Shanghai Mechanical & Electrical IndustryLtd is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Key Takeaway

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Shanghai Mechanical & Electrical IndustryLtd maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. 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.

Before you settle on your opinion, we've discovered 1 warning sign for Shanghai Mechanical & Electrical IndustryLtd that you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com