Sentiment Still Eluding Shenzhen International Holdings Limited (HKG:152)

When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") above 11x, you may consider Shenzhen International Holdings Limited (HKG:152) as an attractive investment with its 6.5x 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.

With earnings growth that's superior to most other companies of late, Shenzhen International Holdings has been doing relatively well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Shenzhen International Holdings

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Does Growth Match The Low P/E?

The only time you'd be truly comfortable seeing a P/E as low as Shenzhen International Holdings' is when the company's growth is on track to lag the market.

If we review the last year of earnings growth, the company posted a terrific increase of 221%. However, this wasn't enough as the latest three year period has seen a very unpleasant 31% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 12% each year as estimated by the five analysts watching the company. With the market predicted to deliver 12% growth per year, the company is positioned for a comparable earnings result.

With this information, we find it odd that Shenzhen International Holdings is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting lower selling prices.

The Bottom Line On Shenzhen International Holdings' P/E

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Shenzhen International Holdings' analyst forecasts revealed that its market-matching earnings outlook isn't contributing to its P/E as much as we would have predicted. When we see an average earnings outlook with market-like growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

Before you take the next step, you should know about the 2 warning signs for Shenzhen International Holdings (1 is potentially serious!) that we have uncovered.

Of course, you might also be able to find a better stock than Shenzhen International Holdings. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.