Shanghai Shuixing Home Textile Co., Ltd.'s (SHSE:603365) Shares Lagging The Market But So Is The Business

With a price-to-earnings (or "P/E") ratio of 12.9x Shanghai Shuixing Home Textile Co., Ltd. (SHSE:603365) may be sending very bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 30x and even P/E's higher than 55x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Shanghai Shuixing Home Textile certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. 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 Shanghai Shuixing Home Textile

Keen to find out how analysts think Shanghai Shuixing Home Textile'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 Shuixing Home Textile?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Shanghai Shuixing Home Textile's to be considered reasonable.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 9.1% last year. EPS has also lifted 28% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Shifting to the future, estimates from the one analyst covering the company suggest earnings should grow by 21% over the next year. That's shaping up to be materially lower than the 41% growth forecast for the broader market.

With this information, we can see why Shanghai Shuixing Home Textile is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What We Can Learn From Shanghai Shuixing Home Textile's P/E?

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 Shuixing Home Textile'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.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Shanghai Shuixing Home Textile you should know about.

You might be able to find a better investment than Shanghai Shuixing Home Textile. 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).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.