Investors Aren't Entirely Convinced By Jizhong Energy Resources Co., Ltd.'s (SZSE:000937) Earnings

With a price-to-earnings (or "P/E") ratio of 8.1x Jizhong Energy Resources Co., Ltd. (SZSE:000937) may be sending very bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 31x and even P/E's higher than 56x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

While the market has experienced earnings growth lately, Jizhong Energy Resources' earnings have gone into reverse gear, which is not great. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

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Does Growth Match The Low P/E?

In order to justify its P/E ratio, Jizhong Energy Resources would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered a frustrating 21% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 340% in total over the last three years. 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.

Looking ahead now, EPS is anticipated to climb by 41% during the coming year according to the dual analysts following the company. With the market only predicted to deliver 36%, the company is positioned for a stronger earnings result.

In light of this, it's peculiar that Jizhong Energy Resources' P/E sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Key Takeaway

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.

We've established that Jizhong Energy Resources currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

Before you settle on your opinion, we've discovered 1 warning sign for Jizhong Energy Resources that you should be aware of.

Of course, you might also be able to find a better stock than Jizhong 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.

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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.