When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 29x, you may consider Shanghai GenTech Co., Ltd. (SHSE:688596) as an attractive investment with its 23.2x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
With earnings growth that's superior to most other companies of late, Shanghai GenTech has been doing relatively well. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
View our latest analysis for Shanghai GenTech
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 GenTech's is when the company's growth is on track to lag the market.
Retrospectively, the last year delivered an exceptional 50% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 171% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.
Turning to the outlook, the next three years should generate growth of 29% each year as estimated by the three analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 25% each year, which is noticeably less attractive.
With this information, we find it odd that Shanghai GenTech is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.
The Bottom Line On Shanghai GenTech's P/E
Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
Our examination of Shanghai GenTech's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.
There are also other vital risk factors to consider and we've discovered 3 warning signs for Shanghai GenTech (1 is potentially serious!) that you should be aware of before investing here.
If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
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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
About SHSE:688596
Shanghai GenTech
Provides process critical system solutions to customers in hi-tech and advanced manufacturing industries in China.
High growth potential with adequate balance sheet.
