Improved Earnings Required Before Sichuan Kexin Mechanical and Electrical Equipment Co.,Ltd (SZSE:300092) Shares Find Their Feet

Sichuan Kexin Mechanical and Electrical Equipment Co.,Ltd's (SZSE:300092) price-to-earnings (or "P/E") ratio of 17.2x 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 67x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

The recently shrinking earnings for Sichuan Kexin Mechanical and Electrical EquipmentLtd have been in line with the market. One possibility is that the P/E is low because investors think the company's earnings may begin to slide even faster. You'd much rather the company wasn't bleeding earnings if you still believe in the business. In saying that, existing shareholders may feel hopeful about the share price if the company's earnings continue tracking the market.

Check out our latest analysis for Sichuan Kexin Mechanical and Electrical EquipmentLtd

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Is There Any Growth For Sichuan Kexin Mechanical and Electrical EquipmentLtd?

The only time you'd be truly comfortable seeing a P/E as low as Sichuan Kexin Mechanical and Electrical EquipmentLtd's is when the company's growth is on track to lag the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 3.1%. Still, the latest three year period has seen an excellent 69% overall rise in EPS, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very 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 24% during the coming year according to the one analyst following the company. Meanwhile, the rest of the market is forecast to expand by 38%, which is noticeably more attractive.

In light of this, it's understandable that Sichuan Kexin Mechanical and Electrical EquipmentLtd's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

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.

We've established that Sichuan Kexin Mechanical and Electrical EquipmentLtd maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for Sichuan Kexin Mechanical and Electrical EquipmentLtd with six simple checks will allow you to discover any risks that could be an issue.

You might be able to find a better investment than Sichuan Kexin Mechanical and Electrical EquipmentLtd. 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.