Why Investors Shouldn't Be Surprised By Shanghai Aiko Solar Energy Co.,Ltd.'s (SHSE:600732) Low P/E

Shanghai Aiko Solar Energy Co.,Ltd.'s (SHSE:600732) price-to-earnings (or "P/E") ratio of 8.5x might make it look like a strong 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 50x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

Shanghai Aiko Solar EnergyLtd certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. 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.

Check out our latest analysis for Shanghai Aiko Solar EnergyLtd

Want the full picture on analyst estimates for the company? Then our free report on Shanghai Aiko Solar EnergyLtd will help you uncover what's on the horizon.

Is There Any Growth For Shanghai Aiko Solar EnergyLtd?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Shanghai Aiko Solar EnergyLtd's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 271%. Pleasingly, EPS has also lifted 870% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 5.7% during the coming year according to the six analysts following the company. That's shaping up to be materially lower than the 36% growth forecast for the broader market.

With this information, we can see why Shanghai Aiko Solar EnergyLtd is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

What We Can Learn From Shanghai Aiko Solar EnergyLtd's P/E?

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.

We've established that Shanghai Aiko Solar EnergyLtd maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. 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.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Shanghai Aiko Solar EnergyLtd (1 doesn't sit too well with us) you should be aware of.

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

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

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.