Zhongxing Shenyang Commercial Building Group Co.,Ltd's (SZSE:000715) Price Is Right But Growth Is Lacking After Shares Rocket 26%

Zhongxing Shenyang Commercial Building Group Co.,Ltd (SZSE:000715) shares have continued their recent momentum with a 26% gain in the last month alone. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 2.1% over the last year.

Although its price has surged higher, Zhongxing Shenyang Commercial Building GroupLtd's price-to-earnings (or "P/E") ratio of 29.5x 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 38x and even P/E's above 75x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

With earnings that are retreating more than the market's of late, Zhongxing Shenyang Commercial Building GroupLtd has been very sluggish. 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. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.

See our latest analysis for Zhongxing Shenyang Commercial Building GroupLtd

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

In order to justify its P/E ratio, Zhongxing Shenyang Commercial Building GroupLtd would need to produce sluggish growth that's trailing the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 9.3%. This means it has also seen a slide in earnings over the longer-term as EPS is down 32% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the one analyst covering the company suggest earnings growth is heading into negative territory, declining 28% over the next year. That's not great when the rest of the market is expected to grow by 38%.

With this information, we are not surprised that Zhongxing Shenyang Commercial Building GroupLtd is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Final Word

Despite Zhongxing Shenyang Commercial Building GroupLtd's shares building up a head of steam, its P/E still lags most other companies. 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 Zhongxing Shenyang Commercial Building GroupLtd's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

You need to take note of risks, for example - Zhongxing Shenyang Commercial Building GroupLtd has 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

If you're unsure about the strength of Zhongxing Shenyang Commercial Building GroupLtd'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.