What Shandong Mining Machinery Group Co., Ltd.'s (SZSE:002526) 26% Share Price Gain Is Not Telling You

The Shandong Mining Machinery Group Co., Ltd. (SZSE:002526) share price has done very well over the last month, posting an excellent gain of 26%. Looking further back, the 14% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Since its price has surged higher, Shandong Mining Machinery Group's price-to-earnings (or "P/E") ratio of 71.6x might make it look like a strong sell right now compared to the market in China, where around half of the companies have P/E ratios below 36x and even P/E's below 21x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

For instance, Shandong Mining Machinery Group's receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Shandong Mining Machinery Group

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Shandong Mining Machinery Group will help you shine a light on its historical performance.

How Is Shandong Mining Machinery Group's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as Shandong Mining Machinery Group's is when the company's growth is on track to outshine the market decidedly.

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 61%. Even so, admirably EPS has lifted 71% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Comparing that to the market, which is predicted to deliver 41% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

With this information, we find it concerning that Shandong Mining Machinery Group is trading at a P/E higher than the market. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

What We Can Learn From Shandong Mining Machinery Group's P/E?

Shandong Mining Machinery Group's P/E is flying high just like its stock has during the last month. 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.

Our examination of Shandong Mining Machinery Group revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Having said that, be aware Shandong Mining Machinery Group is showing 3 warning signs in our investment analysis, and 1 of those shouldn't be ignored.

Of course, you might also be able to find a better stock than Shandong Mining Machinery Group. 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.