Inner Mongolia First Machinery Group Co.,Ltd.'s (SHSE:600967) Low P/E No Reason For Excitement

With a price-to-earnings (or "P/E") ratio of 16.6x Inner Mongolia First Machinery Group Co.,Ltd. (SHSE:600967) may be sending bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 32x and even P/E's higher than 60x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

While the market has experienced earnings growth lately, Inner Mongolia First Machinery GroupLtd'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.

See our latest analysis for Inner Mongolia First Machinery GroupLtd

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Does Growth Match The Low P/E?

Inner Mongolia First Machinery GroupLtd's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 2.3%. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 16% in total. 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.

Turning to the outlook, the next three years should generate growth of 9.6% per year as estimated by the only analyst watching the company. Meanwhile, the rest of the market is forecast to expand by 26% per annum, which is noticeably more attractive.

In light of this, it's understandable that Inner Mongolia First Machinery GroupLtd'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.

What We Can Learn From Inner Mongolia First Machinery GroupLtd's P/E?

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 Inner Mongolia First Machinery GroupLtd'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.

You should always think about risks. Case in point, we've spotted 2 warning signs for Inner Mongolia First Machinery GroupLtd you should be aware of, and 1 of them is potentially serious.

If these risks are making you reconsider your opinion on Inner Mongolia First Machinery GroupLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.