Investors Aren't Buying Shaanxi Energy Investment Co., Ltd.'s (SZSE:001286) Earnings

With a price-to-earnings (or "P/E") ratio of 12.2x Shaanxi Energy Investment Co., Ltd. (SZSE:001286) may be sending very bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 35x and even P/E's higher than 68x 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.

Recent times haven't been advantageous for Shaanxi Energy Investment as its earnings have been falling quicker than most other companies. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.

View our latest analysis for Shaanxi Energy Investment

Keen to find out how analysts think Shaanxi Energy Investment's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Shaanxi Energy Investment's Growth Trending?

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

Retrospectively, the last year delivered a frustrating 3.6% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 486% in total over the last three years. 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.

Turning to the outlook, the next year should generate growth of 11% as estimated by the four analysts watching the company. With the market predicted to deliver 38% growth , the company is positioned for a weaker earnings result.

With this information, we can see why Shaanxi Energy Investment is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Key Takeaway

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.

As we suspected, our examination of Shaanxi Energy Investment's 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. 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 Shaanxi Energy Investment that you should be aware of.

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.