Baoshan Iron & Steel Co., Ltd. (SHSE:600019) Looks Inexpensive But Perhaps Not Attractive Enough

Baoshan Iron & Steel Co., Ltd.'s (SHSE:600019) price-to-earnings (or "P/E") ratio of 15.3x 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 35x and even P/E's above 69x 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.

Recent times haven't been advantageous for Baoshan Iron & Steel 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. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. 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 Baoshan Iron & Steel

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Baoshan Iron & Steel.

Does Growth Match The Low P/E?

In order to justify its P/E ratio, Baoshan Iron & Steel would need to produce anemic growth that's substantially trailing the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 15%. The last three years don't look nice either as the company has shrunk EPS by 64% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 13% over the next year. That's shaping up to be materially lower than the 39% growth forecast for the broader market.

With this information, we can see why Baoshan Iron & Steel is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Bottom Line On Baoshan Iron & Steel'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.

As we suspected, our examination of Baoshan Iron & Steel'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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Baoshan Iron & Steel that you should be aware of.

You might be able to find a better investment than Baoshan Iron & Steel. 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.