Improved Earnings Required Before Himile Mechanical Science and Technology (Shandong) Co., Ltd (SZSE:002595) Shares Find Their Feet

When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 32x, you may consider Himile Mechanical Science and Technology (Shandong) Co., Ltd (SZSE:002595) as an attractive investment with its 21.1x P/E ratio. 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 pleasing for Himile Mechanical Science and Technology (Shandong) as its earnings have risen in spite of the market's earnings going into reverse. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

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

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Himile Mechanical Science and Technology (Shandong).

Does Growth Match The Low P/E?

In order to justify its P/E ratio, Himile Mechanical Science and Technology (Shandong) would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered an exceptional 28% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 67% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 11% each year as estimated by the six analysts watching the company. That's shaping up to be materially lower than the 19% per year growth forecast for the broader market.

With this information, we can see why Himile Mechanical Science and Technology (Shandong) is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Key Takeaway

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

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. It's hard to see the share price rising strongly in the near future under these circumstances.

Plus, you should also learn about this 1 warning sign we've spotted with Himile Mechanical Science and Technology (Shandong).

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.