A Piece Of The Puzzle Missing From Gansu Shangfeng Cement Co.,Ltd's (SZSE:000672) 35% Share Price Climb

Gansu Shangfeng Cement Co.,Ltd (SZSE:000672) shareholders have had their patience rewarded with a 35% share price jump in the last month. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

Even after such a large jump in price, Gansu Shangfeng CementLtd may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 20.5x, since almost half of all companies in China have P/E ratios greater than 33x and even P/E's higher than 64x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Gansu Shangfeng CementLtd 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. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.

Check out our latest analysis for Gansu Shangfeng CementLtd

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Is There Any Growth For Gansu Shangfeng CementLtd?

In order to justify its P/E ratio, Gansu Shangfeng CementLtd would need to produce sluggish growth that's trailing the market.

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 50%. As a result, earnings from three years ago have also fallen 81% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next three years should generate growth of 22% per annum as estimated by the four analysts watching the company. With the market only predicted to deliver 18% per annum, the company is positioned for a stronger earnings result.

In light of this, it's peculiar that Gansu Shangfeng CementLtd'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.

The Bottom Line On Gansu Shangfeng CementLtd's P/E

Despite Gansu Shangfeng CementLtd's shares building up a head of steam, its P/E still lags most other companies. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Gansu Shangfeng CementLtd currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. 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. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.

There are also other vital risk factors to consider before investing and we've discovered 3 warning signs for Gansu Shangfeng CementLtd that you should be aware of.

If you're unsure about the strength of Gansu Shangfeng CementLtd'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.