Suzhou Hailu Heavy Industry Co.,Ltd's (SZSE:002255) Share Price Boosted 33% But Its Business Prospects Need A Lift Too

Despite an already strong run, Suzhou Hailu Heavy Industry Co.,Ltd (SZSE:002255) shares have been powering on, with a gain of 33% in the last thirty days. The last 30 days bring the annual gain to a very sharp 33%.

Even after such a large jump in price, Suzhou Hailu Heavy IndustryLtd's price-to-earnings (or "P/E") ratio of 16.5x 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 36x and even P/E's above 71x 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.

For example, consider that Suzhou Hailu Heavy IndustryLtd's financial performance has been poor lately as its earnings have been in decline. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

See our latest analysis for Suzhou Hailu Heavy IndustryLtd

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Suzhou Hailu Heavy IndustryLtd will help you shine a light on its historical performance.

How Is Suzhou Hailu Heavy IndustryLtd's Growth Trending?

In order to justify its P/E ratio, Suzhou Hailu Heavy IndustryLtd would need to produce anemic growth that's substantially trailing the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 6.6%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 25% overall rise in EPS. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 39% shows it's noticeably less attractive on an annualised basis.

With this information, we can see why Suzhou Hailu Heavy IndustryLtd is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

What We Can Learn From Suzhou Hailu Heavy IndustryLtd's P/E?

Suzhou Hailu Heavy IndustryLtd's recent share price jump still sees its P/E sitting firmly flat on the ground. 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 Suzhou Hailu Heavy IndustryLtd maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. 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.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for Suzhou Hailu Heavy IndustryLtd with six simple checks.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.