Suzhou Hailu Heavy Industry Co.,Ltd (SZSE:002255) Shares Fly 35% But Investors Aren't Buying For Growth

Suzhou Hailu Heavy Industry Co.,Ltd (SZSE:002255) shareholders are no doubt pleased to see that the share price has bounced 35% in the last month, although it is still struggling to make up recently lost ground. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 2.5% over the last year.

In spite of the firm bounce in price, Suzhou Hailu Heavy IndustryLtd's price-to-earnings (or "P/E") ratio of 11.5x might still 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 30x and even P/E's above 55x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

The earnings growth achieved at Suzhou Hailu Heavy IndustryLtd over the last year would be more than acceptable for most companies. It might be that many expect the respectable earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

Check out our latest analysis for Suzhou Hailu Heavy IndustryLtd

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 Suzhou Hailu Heavy IndustryLtd's earnings, revenue and cash flow.

Does Growth Match The Low P/E?

Suzhou Hailu Heavy IndustryLtd'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.

If we review the last year of earnings growth, the company posted a worthy increase of 9.1%. However, due to its less than impressive performance prior to this period, EPS growth is practically non-existent over the last three years overall. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

This is in contrast to the rest of the market, which is expected to grow by 41% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why Suzhou Hailu Heavy IndustryLtd is trading at a P/E lower than the market. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Bottom Line On Suzhou Hailu Heavy IndustryLtd's P/E

Shares in Suzhou Hailu Heavy IndustryLtd are going to need a lot more upward momentum to get the company's P/E out of its slump. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Suzhou Hailu Heavy IndustryLtd revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

A lot of potential risks can sit within a company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Suzhou Hailu Heavy IndustryLtd with six simple checks.

If you're unsure about the strength of Suzhou Hailu Heavy IndustryLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.