There's No Escaping Shanghai Liangxin Electrical Co.,LTD.'s (SZSE:002706) Muted Earnings Despite A 28% Share Price Rise

Shanghai Liangxin Electrical Co.,LTD. (SZSE:002706) shareholders would be excited to see that the share price has had a great month, posting a 28% gain and recovering from prior weakness. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 33% over that time.

In spite of the firm bounce in price, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 30x, you may still consider Shanghai Liangxin ElectricalLTD as an attractive investment with its 17.9x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Shanghai Liangxin ElectricalLTD has been struggling lately as its earnings have declined faster than most other companies. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.

See our latest analysis for Shanghai Liangxin ElectricalLTD

Keen to find out how analysts think Shanghai Liangxin ElectricalLTD's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Any Growth For Shanghai Liangxin ElectricalLTD?

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

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 2.6%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 9.9% overall rise in EPS. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.

Looking ahead now, EPS is anticipated to climb by 14% per annum during the coming three years according to the eight analysts following the company. With the market predicted to deliver 19% growth per annum, the company is positioned for a weaker earnings result.

With this information, we can see why Shanghai Liangxin ElectricalLTD 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

Despite Shanghai Liangxin ElectricalLTD's shares building up a head of steam, its P/E still lags most other companies. 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.

As we suspected, our examination of Shanghai Liangxin ElectricalLTD'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 these 2 warning signs we've spotted with Shanghai Liangxin ElectricalLTD.

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.