Investors Don't See Light At End Of Zhengzhou Coal Mining Machinery Group Company Limited's (SHSE:601717) Tunnel

Zhengzhou Coal Mining Machinery Group Company Limited's (SHSE:601717) price-to-earnings (or "P/E") ratio of 8.5x might make it look like a strong buy right now compared to the market in China, where around half of the companies have P/E ratios above 32x and even P/E's above 58x are quite common. However, the P/E might be quite low 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, Zhengzhou Coal Mining Machinery Group has been doing quite well of late. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

See our latest analysis for Zhengzhou Coal Mining Machinery Group

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Zhengzhou Coal Mining Machinery Group.

Does Growth Match The Low P/E?

Zhengzhou Coal Mining Machinery Group's P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

Retrospectively, the last year delivered an exceptional 29% gain to the company's bottom line. The latest three year period has also seen an excellent 148% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 20% during the coming year according to the three analysts following the company. That's shaping up to be materially lower than the 40% growth forecast for the broader market.

In light of this, it's understandable that Zhengzhou Coal Mining Machinery Group's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What We Can Learn From Zhengzhou Coal Mining Machinery Group's P/E?

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Zhengzhou Coal Mining Machinery Group maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. 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.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Zhengzhou Coal Mining Machinery Group that you should be aware of.

You might be able to find a better investment than Zhengzhou Coal Mining Machinery Group. 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.