Zhongshan Public Utilities Group Co.,Ltd's (SZSE:000685) Share Price Boosted 26% But Its Business Prospects Need A Lift Too

Zhongshan Public Utilities Group Co.,Ltd (SZSE:000685) shareholders have had their patience rewarded with a 26% share price jump in the last month. Looking further back, the 20% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Although its price has surged higher, Zhongshan Public Utilities GroupLtd may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 14x, since almost half of all companies in China have P/E ratios greater than 30x and even P/E's higher than 58x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

For instance, Zhongshan Public Utilities GroupLtd'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 Zhongshan Public Utilities GroupLtd

Although there are no analyst estimates available for Zhongshan Public Utilities GroupLtd, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Does Growth Match The Low P/E?

The only time you'd be truly comfortable seeing a P/E as depressed as Zhongshan Public Utilities GroupLtd's is when the company's growth is on track to lag the market decidedly.

Retrospectively, the last year delivered a frustrating 15% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 35% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

In contrast to the company, the rest of the market is expected to grow by 36% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's understandable that Zhongshan Public Utilities GroupLtd's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Final Word

Even after such a strong price move, Zhongshan Public Utilities GroupLtd's P/E still trails the rest of the market significantly. 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 Zhongshan Public Utilities GroupLtd revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

Before you take the next step, you should know about the 3 warning signs for Zhongshan Public Utilities GroupLtd (1 is a bit concerning!) that we have uncovered.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on 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.