Earnings Tell The Story For Shanghai Zhongzhou Special Alloy Materials Co., Ltd. (SZSE:300963)

When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 27x, you may consider Shanghai Zhongzhou Special Alloy Materials Co., Ltd. (SZSE:300963) as a stock to potentially avoid with its 33.2x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

Shanghai Zhongzhou Special Alloy Materials could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Shanghai Zhongzhou Special Alloy Materials

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Shanghai Zhongzhou Special Alloy Materials.

How Is Shanghai Zhongzhou Special Alloy Materials' Growth Trending?

Shanghai Zhongzhou Special Alloy Materials' P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 12%. As a result, earnings from three years ago have also fallen 9.1% 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 31% each year as estimated by the dual analysts watching the company. That's shaping up to be materially higher than the 24% each year growth forecast for the broader market.

In light of this, it's understandable that Shanghai Zhongzhou Special Alloy Materials' P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Shanghai Zhongzhou Special Alloy Materials' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Before you take the next step, you should know about the 2 warning signs for Shanghai Zhongzhou Special Alloy Materials (1 is a bit unpleasant!) that we have uncovered.

You might be able to find a better investment than Shanghai Zhongzhou Special Alloy Materials. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com