Improved Earnings Required Before Haier Smart Home Co., Ltd. (SHSE:600690) Shares Find Their Feet

When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 27x, you may consider Haier Smart Home Co., Ltd. (SHSE:600690) as an attractive investment with its 13.1x P/E ratio. 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 Haier Smart Home 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.

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Is There Any Growth For Haier Smart Home?

In order to justify its P/E ratio, Haier Smart Home would need to produce sluggish growth that's trailing the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 15% last year. EPS has also lifted 26% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 11% per annum as estimated by the analysts watching the company. That's shaping up to be materially lower than the 23% each year growth forecast for the broader market.

In light of this, it's understandable that Haier Smart Home'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.

What We Can Learn From Haier Smart Home's P/E?

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.

As we suspected, our examination of Haier Smart Home's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Haier Smart Home with six simple checks on some of these key factors.

If these risks are making you reconsider your opinion on Haier Smart Home, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.