Earnings Not Telling The Story For SINOMACH HEAVY EQUIPMENT GROUP CO.,LTD (SHSE:601399)

SINOMACH HEAVY EQUIPMENT GROUP CO.,LTD's (SHSE:601399) price-to-earnings (or "P/E") ratio of 40.8x might make it look like a sell right now compared to the market in China, where around half of the companies have P/E ratios below 27x and even P/E's below 16x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Earnings have risen firmly for SINOMACH HEAVY EQUIPMENT GROUPLTD recently, which is pleasing to see. It might be that many expect the respectable earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for SINOMACH HEAVY EQUIPMENT GROUPLTD

Although there are no analyst estimates available for SINOMACH HEAVY EQUIPMENT GROUPLTD, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is SINOMACH HEAVY EQUIPMENT GROUPLTD's Growth Trending?

There's an inherent assumption that a company should outperform the market for P/E ratios like SINOMACH HEAVY EQUIPMENT GROUPLTD's to be considered reasonable.

If we review the last year of earnings growth, the company posted a worthy increase of 12%. The latest three year period has also seen a 13% overall rise in EPS, aided somewhat by its short-term performance. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

This is in contrast to the rest of the market, which is expected to grow by 36% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's alarming that SINOMACH HEAVY EQUIPMENT GROUPLTD's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

What We Can Learn From SINOMACH HEAVY EQUIPMENT GROUPLTD's P/E?

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 SINOMACH HEAVY EQUIPMENT GROUPLTD currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Many other vital risk factors can be found on the company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for SINOMACH HEAVY EQUIPMENT GROUPLTD with six simple checks.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.