Investors Don't See Light At End Of Shaanxi Coal Industry Company Limited's (SHSE:601225) Tunnel

Shaanxi Coal Industry Company Limited's (SHSE:601225) price-to-earnings (or "P/E") ratio of 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 39x and even P/E's above 75x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

With earnings that are retreating more than the market's of late, Shaanxi Coal Industry has been very sluggish. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. You'd much rather the company wasn't bleeding earnings if you still believe in the business. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Check out our latest analysis for Shaanxi Coal Industry

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Shaanxi Coal Industry.

Does Growth Match The Low P/E?

Shaanxi Coal Industry's P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

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 5.7%. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 19% in total. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.

Turning to the outlook, the next year should generate growth of 6.6% as estimated by the eleven analysts watching the company. That's shaping up to be materially lower than the 37% growth forecast for the broader market.

In light of this, it's understandable that Shaanxi Coal Industry's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Final Word

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 Shaanxi Coal Industry'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. It's hard to see the share price rising strongly in the near future under these circumstances.

Plus, you should also learn about this 1 warning sign we've spotted with Shaanxi Coal Industry.

You might be able to find a better investment than Shaanxi Coal Industry. 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).

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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.