Shandong Humon Smelting Co., Ltd. (SZSE:002237) Could Be Riskier Than It Looks

Shandong Humon Smelting Co., Ltd.'s (SZSE:002237) 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 28x and even P/E's above 53x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Shandong Humon Smelting certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. 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 not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for Shandong Humon Smelting

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Shandong Humon Smelting.

Is There Any Growth For Shandong Humon Smelting?

In order to justify its P/E ratio, Shandong Humon Smelting would need to produce sluggish growth that's trailing the market.

If we review the last year of earnings, the company posted a result that saw barely any deviation from a year ago. Fortunately, a few good years before that means that it was still able to grow EPS by 7.6% in total over the last three years. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 36% each year during the coming three years according to the dual analysts following the company. 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 Shandong Humon Smelting'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 Final Word

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 Shandong Humon Smelting 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.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Shandong Humon Smelting (of which 1 shouldn't be ignored!) you should know about.

You might be able to find a better investment than Shandong Humon Smelting. 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.