Shenzhen Zhongjin Lingnan Nonfemet Co. Ltd. (SZSE:000060) Could Be Riskier Than It Looks

Shenzhen Zhongjin Lingnan Nonfemet Co. Ltd.'s (SZSE:000060) price-to-earnings (or "P/E") ratio of 22.2x might make it look like a buy right now compared to the market in China, where around half of the companies have P/E ratios above 26x and even P/E's above 50x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Recent times haven't been advantageous for Shenzhen Zhongjin Lingnan Nonfemet as its earnings have been falling quicker than most other companies. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. 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.

See our latest analysis for Shenzhen Zhongjin Lingnan Nonfemet

Keen to find out how analysts think Shenzhen Zhongjin Lingnan Nonfemet's future stacks up against the industry? In that case, our free report is a great place to start.

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 Shenzhen Zhongjin Lingnan Nonfemet's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 21% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 51% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the dual analysts covering the company suggest earnings should grow by 26% each year over the next three years. That's shaping up to be materially higher than the 19% each year growth forecast for the broader market.

In light of this, it's peculiar that Shenzhen Zhongjin Lingnan Nonfemet's P/E sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

What We Can Learn From Shenzhen Zhongjin Lingnan Nonfemet'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.

We've established that Shenzhen Zhongjin Lingnan Nonfemet currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.

Before you take the next step, you should know about the 2 warning signs for Shenzhen Zhongjin Lingnan Nonfemet (1 is a bit concerning!) that we have uncovered.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.