Shenzhen Gas Corporation Ltd.'s (SHSE:601139) Prospects Need A Boost To Lift Shares

When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 37x, you may consider Shenzhen Gas Corporation Ltd. (SHSE:601139) as a highly attractive investment with its 15.3x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

The recently shrinking earnings for Shenzhen Gas have been in line with the market. It might be that many expect the company's earnings performance to degrade further, which has repressed the P/E. You'd much rather the company wasn't bleeding earnings if you still believe in the business. In saying that, existing shareholders may feel hopeful about the share price if the company's earnings continue tracking the market.

View our latest analysis for Shenzhen Gas

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Shenzhen Gas.

How Is Shenzhen Gas' Growth Trending?

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

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 1.8%. The last three years don't look nice either as the company has shrunk EPS by 3.4% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to climb by 24% during the coming year according to the nine analysts following the company. That's shaping up to be materially lower than the 40% growth forecast for the broader market.

With this information, we can see why Shenzhen Gas 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 Shenzhen Gas' 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.

As we suspected, our examination of Shenzhen Gas' analyst forecasts revealed that its inferior earnings outlook 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Shenzhen Gas that you need to be mindful of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.