SINOMACH HEAVY EQUIPMENT GROUP CO.,LTD's (SHSE:601399) Shares May Have Run Too Fast Too Soon

When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 38x, you may consider SINOMACH HEAVY EQUIPMENT GROUP CO.,LTD (SHSE:601399) as a stock to potentially avoid with its 43.9x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

With its earnings growth in positive territory compared to the declining earnings of most other companies, SINOMACH HEAVY EQUIPMENT GROUPLTD has been doing quite well of late. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. 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

Want the full picture on analyst estimates for the company? Then our free report on SINOMACH HEAVY EQUIPMENT GROUPLTD will help you uncover what's on the horizon.

Is There Enough Growth For SINOMACH HEAVY EQUIPMENT GROUPLTD?

The only time you'd be truly comfortable seeing a P/E as high as SINOMACH HEAVY EQUIPMENT GROUPLTD's is when the company's growth is on track to outshine the market.

If we review the last year of earnings growth, the company posted a worthy increase of 14%. The latest three year period has also seen an excellent 46% overall rise in EPS, aided somewhat by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the one analyst covering the company suggest earnings should grow by 24% over the next year. With the market predicted to deliver 37% growth , the company is positioned for a weaker earnings result.

With this information, we find it concerning that SINOMACH HEAVY EQUIPMENT GROUPLTD is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Key Takeaway

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.

We've established that SINOMACH HEAVY EQUIPMENT GROUPLTD currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these 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.

You might be able to find a better investment than SINOMACH HEAVY EQUIPMENT GROUPLTD. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.