Shanghai Putailai New Energy Technology Co.,Ltd.'s (SHSE:603659) Shares Bounce 28% But Its Business Still Trails The Market

Shanghai Putailai New Energy Technology Co.,Ltd. (SHSE:603659) shareholders would be excited to see that the share price has had a great month, posting a 28% gain and recovering from prior weakness. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 38% over that time.

Although its price has surged higher, Shanghai Putailai New Energy TechnologyLtd may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 19.3x, since almost half of all companies in China have P/E ratios greater than 31x and even P/E's higher than 57x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Shanghai Putailai New Energy TechnologyLtd could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If you still 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 Shanghai Putailai New Energy TechnologyLtd

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What Are Growth Metrics Telling Us About The Low P/E?

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

Retrospectively, the last year delivered a frustrating 12% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 233% overall rise in EPS, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 11% during the coming year according to the analysts following the company. That's shaping up to be materially lower than the 36% growth forecast for the broader market.

In light of this, it's understandable that Shanghai Putailai New Energy TechnologyLtd's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Key Takeaway

Despite Shanghai Putailai New Energy TechnologyLtd's shares building up a head of steam, its P/E still lags most other companies. 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.

As we suspected, our examination of Shanghai Putailai New Energy TechnologyLtd'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.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Shanghai Putailai New Energy TechnologyLtd (1 makes us a bit uncomfortable!) that you need to be mindful of.

You might be able to find a better investment than Shanghai Putailai New Energy TechnologyLtd. 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.