Shanghai Huayi Group Corporation Limited (SHSE:600623) Screens Well But There Might Be A Catch

With a price-to-earnings (or "P/E") ratio of 17.6x Shanghai Huayi Group Corporation Limited (SHSE:600623) may be sending bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 35x and even P/E's higher than 69x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Shanghai Huayi Group has been doing quite well of late. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. 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.

Check out our latest analysis for Shanghai Huayi Group

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Shanghai Huayi Group.

Does Growth Match The Low P/E?

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

Taking a look back first, we see that the company managed to grow earnings per share by a handy 4.0% last year. Still, lamentably EPS has fallen 75% in aggregate from three years ago, which is disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the one analyst covering the company suggest earnings should grow by 79% over the next year. Meanwhile, the rest of the market is forecast to only expand by 39%, which is noticeably less attractive.

With this information, we find it odd that Shanghai Huayi Group is trading at a P/E lower than the market. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

The Bottom Line On Shanghai Huayi Group's P/E

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Shanghai Huayi Group's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Shanghai Huayi Group that you need to be mindful of.

Of course, you might also be able to find a better stock than Shanghai Huayi Group. 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.