Himile Mechanical Science and Technology (Shandong) Co., Ltd's (SZSE:002595) Shares Lagging The Market But So Is The Business

Himile Mechanical Science and Technology (Shandong) Co., Ltd's (SZSE:002595) price-to-earnings (or "P/E") ratio of 22.8x might make it look like a buy right now compared to the market in China, where around half of the companies have P/E ratios above 35x and even P/E's above 69x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Himile Mechanical Science and Technology (Shandong) certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. 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 out of favour.

See our latest analysis for Himile Mechanical Science and Technology (Shandong)

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Does Growth Match The Low P/E?

There's an inherent assumption that a company should underperform the market for P/E ratios like Himile Mechanical Science and Technology (Shandong)'s to be considered reasonable.

Retrospectively, the last year delivered an exceptional 24% gain to the company's bottom line. The latest three year period has also seen an excellent 78% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 14% as estimated by the seven analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 38%, which is noticeably more attractive.

With this information, we can see why Himile Mechanical Science and Technology (Shandong) is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Bottom Line On Himile Mechanical Science and Technology (Shandong)'s P/E

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Himile Mechanical Science and Technology (Shandong)'s analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Himile Mechanical Science and Technology (Shandong), and understanding should be part of your investment process.

If you're unsure about the strength of Himile Mechanical Science and Technology (Shandong)'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.