Take Care Before Diving Into The Deep End On Naipu Mining Machinery Co., Ltd. (SZSE:300818)

Naipu Mining Machinery Co., Ltd.'s (SZSE:300818) price-to-earnings (or "P/E") ratio of 23.3x 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 27x and even P/E's above 51x are quite common. 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 advantageous for Naipu Mining Machinery as its earnings have been rising faster 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 not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Naipu Mining Machinery

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Does Growth Match The Low P/E?

There's an inherent assumption that a company should underperform the market for P/E ratios like Naipu Mining Machinery's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 115% last year. The latest three year period has also seen an excellent 127% 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 24% per year during the coming three years according to the two analysts following the company. That's shaping up to be similar to the 24% each year growth forecast for the broader market.

With this information, we find it odd that Naipu Mining Machinery is trading at a P/E lower than the market. It may be that most investors are not convinced the company can achieve future growth expectations.

The Key Takeaway

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.

Our examination of Naipu Mining Machinery's analyst forecasts revealed that its market-matching earnings outlook isn't contributing to its P/E as much as we would have predicted. There could be some unobserved threats to earnings preventing the P/E ratio from matching the outlook. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

Before you take the next step, you should know about the 1 warning sign for Naipu Mining Machinery that we have uncovered.

If you're unsure about the strength of Naipu Mining Machinery's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.

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