Insufficient Growth At Nanjing Iron & Steel Co., Ltd. (SHSE:600282) Hampers Share Price

With a price-to-earnings (or "P/E") ratio of 13.5x Nanjing Iron & Steel Co., Ltd. (SHSE:600282) may be sending very bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 30x and even P/E's higher than 57x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Recent times have been advantageous for Nanjing Iron & Steel as its earnings have been rising faster than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

View our latest analysis for Nanjing Iron & Steel

Keen to find out how analysts think Nanjing Iron & Steel's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Any Growth For Nanjing Iron & Steel?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 29% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 38% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 5.5% each year over the next three years. Meanwhile, the rest of the market is forecast to expand by 25% per annum, which is noticeably more attractive.

With this information, we can see why Nanjing 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 Key Takeaway

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Nanjing Iron & Steel 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.

Plus, you should also learn about these 2 warning signs we've spotted with Nanjing Iron & Steel (including 1 which shouldn't be ignored).

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com