Shanghai Mechanical & Electrical Industry Co.,Ltd.'s (SHSE:600835) Shares Bounce 36% But Its Business Still Trails The Market

The Shanghai Mechanical & Electrical Industry Co.,Ltd. (SHSE:600835) share price has done very well over the last month, posting an excellent gain of 36%. Notwithstanding the latest gain, the annual share price return of 8.3% isn't as impressive.

In spite of the firm bounce in price, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 32x, you may still consider Shanghai Mechanical & Electrical IndustryLtd as a highly attractive investment with its 15.2x 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.

Shanghai Mechanical & Electrical IndustryLtd 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. 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.

View our latest analysis for Shanghai Mechanical & Electrical IndustryLtd

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Shanghai Mechanical & Electrical IndustryLtd.

How Is Shanghai Mechanical & Electrical IndustryLtd's Growth Trending?

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.

Retrospectively, the last year delivered a frustrating 13% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 17% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the two analysts covering the company suggest earnings should grow by 11% each year over the next three years. Meanwhile, the rest of the market is forecast to expand by 18% per annum, which is noticeably more attractive.

In light of this, it's understandable that Shanghai Mechanical & Electrical IndustryLtd'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 Mechanical & Electrical IndustryLtd's P/E

Even after such a strong price move, Shanghai Mechanical & Electrical IndustryLtd's P/E still trails the rest of the market significantly. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Shanghai Mechanical & Electrical IndustryLtd'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.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Shanghai Mechanical & Electrical IndustryLtd you should know about.

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.