Linzhou Heavy Machinery Group Co.,Ltd's (SZSE:002535) Share Price Is Matching Sentiment Around Its Earnings

With a price-to-earnings (or "P/E") ratio of 20.4x Linzhou Heavy Machinery Group Co.,Ltd (SZSE:002535) may be sending bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 30x and even P/E's higher than 58x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Recent times have been quite advantageous for Linzhou Heavy Machinery GroupLtd as its earnings have been rising very briskly. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Linzhou Heavy Machinery GroupLtd

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 Linzhou Heavy Machinery GroupLtd's earnings, revenue and cash flow.

Is There Any Growth For Linzhou Heavy Machinery GroupLtd?

The only time you'd be truly comfortable seeing a P/E as low as Linzhou Heavy Machinery GroupLtd's is when the company's growth is on track to lag the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 106% last year. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Comparing that to the market, which is predicted to deliver 36% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

In light of this, it's understandable that Linzhou Heavy Machinery GroupLtd's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

The Final Word

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 Linzhou Heavy Machinery GroupLtd 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.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Linzhou Heavy Machinery GroupLtd you should know about.

Of course, you might also be able to find a better stock than Linzhou Heavy Machinery GroupLtd. 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.