Even With A 30% Surge, Cautious Investors Are Not Rewarding Shanxi Hi-speed Group Co., Ltd.'s (SZSE:000755) Performance Completely

Shanxi Hi-speed Group Co., Ltd. (SZSE:000755) shareholders would be excited to see that the share price has had a great month, posting a 30% gain and recovering from prior weakness. Looking further back, the 14% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

In spite of the firm bounce in price, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 27x, you may still consider Shanxi Hi-speed Group as an attractive investment with its 19x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

For instance, Shanxi Hi-speed Group's receding earnings in recent times would have to be some food for thought. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

Check out our latest analysis for Shanxi Hi-speed Group

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

In order to justify its P/E ratio, Shanxi Hi-speed Group would need to produce sluggish growth that's trailing the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 16%. Even so, admirably EPS has lifted 427% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 36% shows it's noticeably more attractive on an annualised basis.

In light of this, it's peculiar that Shanxi Hi-speed Group's P/E sits below the majority of other companies. It looks like most investors are not convinced the company can maintain its recent growth rates.

The Final Word

Shanxi Hi-speed Group's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Shanxi Hi-speed Group currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. At least price risks look to be very low if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.

You need to take note of risks, for example - Shanxi Hi-speed Group has 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

If these risks are making you reconsider your opinion on Shanxi Hi-speed Group, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.