Insufficient Growth At XCMG Construction Machinery Co., Ltd. (SZSE:000425) Hampers Share Price

When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 37x, you may consider XCMG Construction Machinery Co., Ltd. (SZSE:000425) as a highly attractive investment with its 15.7x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

Recent times have been pleasing for XCMG Construction Machinery as its earnings have risen in spite of the market's earnings going into reverse. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. 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 XCMG Construction Machinery

If you'd like to see what analysts are forecasting going forward, you should check out our free report on XCMG Construction Machinery.

How Is XCMG Construction Machinery's Growth Trending?

In order to justify its P/E ratio, XCMG Construction Machinery would need to produce anemic growth that's substantially trailing the market.

If we review the last year of earnings growth, the company posted a terrific increase of 32%. However, this wasn't enough as the latest three year period has seen a very unpleasant 52% drop in EPS in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to climb by 34% during the coming year according to the analysts following the company. Meanwhile, the rest of the market is forecast to expand by 38%, which is noticeably more attractive.

With this information, we can see why XCMG Construction Machinery is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Bottom Line On XCMG Construction Machinery'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 XCMG Construction Machinery maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Before you take the next step, you should know about the 3 warning signs for XCMG Construction Machinery (1 can't be ignored!) that we have uncovered.

Of course, you might also be able to find a better stock than XCMG Construction Machinery. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.