The Market Doesn't Like What It Sees From Himile Mechanical Science and Technology (Shandong) Co., Ltd's (SZSE:002595) Earnings Yet

With a price-to-earnings (or "P/E") ratio of 17.2x Himile Mechanical Science and Technology (Shandong) Co., Ltd (SZSE:002595) may be sending bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 29x and even P/E's higher than 54x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Himile Mechanical Science and Technology (Shandong) certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. 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.

Check out 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).

How Is Himile Mechanical Science and Technology (Shandong)'s Growth Trending?

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.

Taking a look back first, we see that the company grew earnings per share by an impressive 34% last year. The latest three year period has also seen an excellent 62% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 10% per annum during the coming three years according to the four analysts following the company. That's shaping up to be materially lower than the 25% per annum 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 Final Word

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Himile Mechanical Science and Technology (Shandong) maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. 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.

You always need to take note of risks, for example - Himile Mechanical Science and Technology (Shandong) has 1 warning sign we think you should be aware of.

You might be able to find a better investment than Himile Mechanical Science and Technology (Shandong). If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com