There's No Escaping Shanghai Kaichuang Marine International Co., Ltd.'s (SHSE:600097) Muted Earnings Despite A 30% Share Price Rise

Shanghai Kaichuang Marine International Co., Ltd. (SHSE:600097) shares have had a really impressive month, gaining 30% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 38% in the last year.

Although its price has surged higher, Shanghai Kaichuang Marine International's price-to-earnings (or "P/E") ratio of 19.1x might still 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 40x and even P/E's above 77x 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.

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Shanghai Kaichuang Marine International certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Shanghai Kaichuang Marine International

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Shanghai Kaichuang Marine International will help you shine a light on its historical performance.

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

There's an inherent assumption that a company should far underperform the market for P/E ratios like Shanghai Kaichuang Marine International's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 84% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 40% drop in EPS in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Comparing that to the market, which is predicted to deliver 37% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

With this information, we are not surprised that Shanghai Kaichuang Marine International is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as recent earnings trends are already weighing down the shares.

The Key Takeaway

Even after such a strong price move, Shanghai Kaichuang Marine International's P/E still trails the rest of the market significantly. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Shanghai Kaichuang Marine International revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Plus, you should also learn about these 3 warning signs we've spotted with Shanghai Kaichuang Marine International (including 1 which is a bit concerning).

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.