Shanghai Zhongzhou Special Alloy Materials Co., Ltd. (SZSE:300963) Held Back By Insufficient Growth Even After Shares Climb 29%

Those holding Shanghai Zhongzhou Special Alloy Materials Co., Ltd. (SZSE:300963) shares would be relieved that the share price has rebounded 29% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 14% in the last twelve months.

Even after such a large jump in price, Shanghai Zhongzhou Special Alloy Materials' price-to-earnings (or "P/E") ratio of 23.4x might still 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 31x and even P/E's above 55x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Shanghai Zhongzhou Special Alloy Materials certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If you 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 Zhongzhou Special Alloy Materials

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Shanghai Zhongzhou Special Alloy Materials will help you shine a light on its historical performance.

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

The only time you'd be truly comfortable seeing a P/E as low as Shanghai Zhongzhou Special Alloy Materials' is when the company's growth is on track to lag the market.

If we review the last year of earnings growth, the company posted a terrific increase of 34%. As a result, it also grew EPS by 13% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 41% shows it's noticeably less attractive on an annualised basis.

In light of this, it's understandable that Shanghai Zhongzhou Special Alloy Materials' P/E sits below the majority of other companies. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

What We Can Learn From Shanghai Zhongzhou Special Alloy Materials' P/E?

The latest share price surge wasn't enough to lift Shanghai Zhongzhou Special Alloy Materials' P/E close to the market median. 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.

As we suspected, our examination of Shanghai Zhongzhou Special Alloy Materials revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

It is also worth noting that we have found 2 warning signs for Shanghai Zhongzhou Special Alloy Materials that you need to take into consideration.

Of course, you might also be able to find a better stock than Shanghai Zhongzhou Special Alloy Materials. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.