Stock Analysis

Improved Earnings Required Before Suzhou Alton Electrical & Mechanical Industry Co., Ltd. (SZSE:301187) Shares Find Their Feet

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Suzhou Alton Electrical & Mechanical Industry Co., Ltd.'s (SZSE:301187) price-to-earnings (or "P/E") ratio of 18.9x 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 33x and even P/E's above 61x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Suzhou Alton Electrical & Mechanical Industry certainly has been doing a good job lately as it's been growing earnings more 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.

See our latest analysis for Suzhou Alton Electrical & Mechanical Industry

SZSE:301187 Price to Earnings Ratio vs Industry May 24th 2024
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What Are Growth Metrics Telling Us About The Low P/E?

In order to justify its P/E ratio, Suzhou Alton Electrical & Mechanical Industry 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 51% last year. Still, EPS has barely risen at all from three years ago in total, which is not ideal. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Shifting to the future, estimates from the two analysts covering the company suggest earnings should grow by 14% per year over the next three years. That's shaping up to be materially lower than the 26% per year growth forecast for the broader market.

In light of this, it's understandable that Suzhou Alton Electrical & Mechanical Industry'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 Bottom Line On Suzhou Alton Electrical & Mechanical Industry's P/E

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Suzhou Alton Electrical & Mechanical Industry 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. 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 Suzhou Alton Electrical & Mechanical Industry (of which 1 shouldn't be ignored!) you should know about.

Of course, you might also be able to find a better stock than Suzhou Alton Electrical & Mechanical Industry. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

Valuation is complex, but we're helping make it simple.

Find out whether Suzhou Alton Electrical & Mechanical Industry is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.