There's No Escaping Baoshan Iron & Steel Co., Ltd.'s (SHSE:600019) Muted Earnings

With a price-to-earnings (or "P/E") ratio of 17.4x Baoshan Iron & Steel Co., Ltd. (SHSE:600019) may be sending very bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 39x and even P/E's higher than 75x 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.

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. 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.

Check out our latest analysis for Baoshan Iron & Steel

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What Are Growth Metrics Telling Us About 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.

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 15%. This means it has also seen a slide in earnings over the longer-term as EPS is down 64% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to climb by 14% during the coming year according to the analysts following the company. That's shaping up to be materially lower than the 37% 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 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.

We've established that Baoshan Iron & Steel maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. 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 Baoshan Iron & Steel.

If these risks are making you reconsider your opinion on Baoshan Iron & Steel, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.