Investors Continue Waiting On Sidelines For Shanghai Datun Energy Resources Co., Ltd. (SHSE:600508)

Shanghai Datun Energy Resources Co., Ltd.'s (SHSE:600508) price-to-earnings (or "P/E") ratio of 11.9x might make it look like a strong buy right now compared to the market in China, where around half of the companies have P/E ratios above 29x and even P/E's above 53x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

Shanghai Datun Energy Resources has been struggling lately as its earnings have declined faster than most other companies. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.

View our latest analysis for Shanghai Datun Energy Resources

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Shanghai Datun Energy Resources.

Is There Any Growth For Shanghai Datun Energy Resources?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Shanghai Datun Energy Resources' 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 50%. Even so, admirably EPS has lifted 86% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the only analyst covering the company suggest earnings should grow by 114% over the next year. That's shaping up to be materially higher than the 41% growth forecast for the broader market.

In light of this, it's peculiar that Shanghai Datun Energy Resources' P/E sits below the majority of other companies. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

What We Can Learn From Shanghai Datun Energy Resources' P/E?

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Shanghai Datun Energy Resources' analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

Having said that, be aware Shanghai Datun Energy Resources is showing 2 warning signs in our investment analysis, you should know about.

Of course, you might also be able to find a better stock than Shanghai Datun Energy Resources. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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.