Shandong Mining Machinery Group Co., Ltd.'s (SZSE:002526) Popularity With Investors Is Under Threat From Overpricing

With a median price-to-earnings (or "P/E") ratio of close to 29x in China, you could be forgiven for feeling indifferent about Shandong Mining Machinery Group Co., Ltd.'s (SZSE:002526) P/E ratio of 28.5x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

The earnings growth achieved at Shandong Mining Machinery Group over the last year would be more than acceptable for most companies. It might be that many expect the respectable earnings performance to wane, which has kept the P/E from rising. 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 not quite in favour.

See our latest analysis for Shandong Mining Machinery Group

Although there are no analyst estimates available for Shandong Mining Machinery Group, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Shandong Mining Machinery Group's Growth Trending?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 24% last year. The latest three year period has also seen an excellent 81% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

This is in contrast to the rest of the market, which is expected to grow by 38% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it interesting that Shandong Mining Machinery Group is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as a continuation of recent earnings trends is likely to weigh down the shares eventually.

The Bottom Line On Shandong Mining Machinery Group's P/E

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Shandong Mining Machinery Group currently trades on a higher than expected P/E since its recent three-year growth is lower than the wider market forecast. Right now we are uncomfortable with the P/E as this earnings performance isn't likely to support a more positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Before you settle on your opinion, we've discovered 4 warning signs for Shandong Mining Machinery Group (2 are a bit concerning!) that you should be aware of.

If these risks are making you reconsider your opinion on Shandong 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.