Investors Aren't Buying Shanxi Lu'an Environmental Energy Development Co., Ltd.'s (SHSE:601699) Earnings

With a price-to-earnings (or "P/E") ratio of 9.8x Shanxi Lu'an Environmental Energy Development Co., Ltd. (SHSE:601699) may be sending very bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 33x and even P/E's higher than 64x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

Recent times haven't been advantageous for Shanxi Lu'an Environmental Energy Development as its earnings have been falling quicker than most other companies. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. You'd much rather the company wasn't bleeding earnings if you still believe in the business. 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 Shanxi Lu'an Environmental Energy Development

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Shanxi Lu'an Environmental Energy Development.

What Are Growth Metrics Telling Us About The Low P/E?

In order to justify its P/E ratio, Shanxi Lu'an Environmental Energy Development would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered a frustrating 64% decrease to the company's bottom line. 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 17% in total. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.

Shifting to the future, estimates from the five analysts covering the company suggest earnings should grow by 1.6% per annum over the next three years. That's shaping up to be materially lower than the 18% each year growth forecast for the broader market.

In light of this, it's understandable that Shanxi Lu'an Environmental Energy Development'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 Shanxi Lu'an Environmental Energy Development'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 Shanxi Lu'an Environmental Energy Development 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.

You always need to take note of risks, for example - Shanxi Lu'an Environmental Energy Development has 2 warning signs we think you should be aware of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.