Why Investors Shouldn't Be Surprised By Zhengzhou Coal Mining Machinery Group Company Limited's (SHSE:601717) Low P/E

When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 28x, you may consider Zhengzhou Coal Mining Machinery Group Company Limited (SHSE:601717) as a highly attractive investment with its 6.2x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Recent times have been advantageous for Zhengzhou Coal Mining Machinery Group as its earnings have been rising faster than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. 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

Keen to find out how analysts think Zhengzhou Coal Mining Machinery Group's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Zhengzhou Coal Mining Machinery Group's Growth Trending?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Zhengzhou Coal Mining Machinery Group's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 32% gain to the company's bottom line. Pleasingly, EPS has also lifted 146% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 11% each year during the coming three years according to the three analysts following the company. With the market predicted to deliver 24% growth each year, the company is positioned for a weaker earnings result.

With this information, we can see why Zhengzhou Coal Mining Machinery Group is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Final Word

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 Zhengzhou Coal Mining Machinery Group'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.

Plus, you should also learn about these 2 warning signs we've spotted with Zhengzhou Coal Mining Machinery Group.

If these risks are making you reconsider your opinion on Zhengzhou Coal Mining Machinery Group, 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com