Qingdao Tianneng Heavy Industries Co.,Ltd's (SZSE:300569) Share Price Boosted 28% But Its Business Prospects Need A Lift Too

Those holding Qingdao Tianneng Heavy Industries Co.,Ltd (SZSE:300569) shares would be relieved that the share price has rebounded 28% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 40% over that time.

Although its price has surged higher, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 30x, you may still consider Qingdao Tianneng Heavy IndustriesLtd as an attractive investment with its 19.7x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

For example, consider that Qingdao Tianneng Heavy IndustriesLtd's financial performance has been poor lately as its earnings have been in decline. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. 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 Qingdao Tianneng Heavy IndustriesLtd

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How Is Qingdao Tianneng Heavy IndustriesLtd's Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like Qingdao Tianneng Heavy IndustriesLtd's to be considered reasonable.

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 5.9%. As a result, earnings from three years ago have also fallen 53% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Comparing that to the market, which is predicted to deliver 41% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

With this information, we are not surprised that Qingdao Tianneng Heavy IndustriesLtd is trading at a P/E lower than the market. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Bottom Line On Qingdao Tianneng Heavy IndustriesLtd's P/E

The latest share price surge wasn't enough to lift Qingdao Tianneng Heavy IndustriesLtd's P/E close to the market median. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Qingdao Tianneng Heavy IndustriesLtd maintains its low P/E on the weakness of its sliding earnings over the medium-term, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

Before you take the next step, you should know about the 2 warning signs for Qingdao Tianneng Heavy IndustriesLtd that we have uncovered.

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.