SINOMACH HEAVY EQUIPMENT GROUP CO.,LTD's (SHSE:601399) Business Is Trailing The Market But Its Shares Aren't

When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 29x, you may consider SINOMACH HEAVY EQUIPMENT GROUP CO.,LTD (SHSE:601399) as a stock to avoid entirely with its 48.9x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Earnings have risen at a steady rate over the last year for SINOMACH HEAVY EQUIPMENT GROUPLTD, which is generally not a bad outcome. One possibility is that the P/E is high because investors think this good earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

Check out our latest analysis for SINOMACH HEAVY EQUIPMENT GROUPLTD

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on SINOMACH HEAVY EQUIPMENT GROUPLTD's earnings, revenue and cash flow.

How Is SINOMACH HEAVY EQUIPMENT GROUPLTD's Growth Trending?

SINOMACH HEAVY EQUIPMENT GROUPLTD's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

If we review the last year of earnings growth, the company posted a worthy increase of 6.0%. Still, lamentably EPS has fallen 3.0% in aggregate from three years ago, which is disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Comparing that to the market, which is predicted to deliver 36% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

With this information, we find it concerning that SINOMACH HEAVY EQUIPMENT GROUPLTD is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Bottom Line On SINOMACH HEAVY EQUIPMENT GROUPLTD's P/E

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

Our examination of SINOMACH HEAVY EQUIPMENT GROUPLTD revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for SINOMACH HEAVY EQUIPMENT GROUPLTD 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.