Improved Earnings Required Before Huaibei Mining Holdings Co.,Ltd. (SHSE:600985) Stock's 35% Jump Looks Justified

Huaibei Mining Holdings Co.,Ltd. (SHSE:600985) shareholders would be excited to see that the share price has had a great month, posting a 35% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 25%.

Although its price has surged higher, Huaibei Mining HoldingsLtd may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 8.5x, since almost half of all companies in China have P/E ratios greater than 32x and even P/E's higher than 61x 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.

Huaibei Mining HoldingsLtd has been struggling lately as its earnings have declined faster than most other companies. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. You'd much rather the company wasn't bleeding earnings if you still believe in the business. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.

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How Is Huaibei Mining HoldingsLtd's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as depressed as Huaibei Mining HoldingsLtd's is when the company's growth is on track to lag the market decidedly.

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 23%. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 5.8% in total. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.

Shifting to the future, estimates from the eight analysts covering the company suggest earnings should grow by 5.0% per year over the next three years. With the market predicted to deliver 19% growth per annum, the company is positioned for a weaker earnings result.

With this information, we can see why Huaibei Mining HoldingsLtd is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Bottom Line On Huaibei Mining HoldingsLtd's P/E

Huaibei Mining HoldingsLtd's recent share price jump still sees its P/E sitting firmly flat on the ground. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Huaibei Mining HoldingsLtd 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.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Huaibei Mining HoldingsLtd that you should be aware of.

If you're unsure about the strength of Huaibei Mining HoldingsLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.