When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") above 10x, you may consider Shanghai Industrial Holdings Limited (HKG:363) as a highly attractive investment with its 3.8x 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.
Shanghai Industrial Holdings certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
See our latest analysis for Shanghai Industrial Holdings
Does Growth Match The Low P/E?
In order to justify its P/E ratio, Shanghai Industrial Holdings would need to produce anemic growth that's substantially trailing the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 26% last year. Still, incredibly EPS has fallen 7.6% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
Looking ahead now, EPS is anticipated to climb by 3.4% per year during the coming three years according to the one analyst following the company. Meanwhile, the rest of the market is forecast to expand by 12% per annum, which is noticeably more attractive.
With this information, we can see why Shanghai Industrial Holdings 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 Bottom Line On Shanghai Industrial Holdings' P/E
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 Shanghai Industrial Holdings maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
Plus, you should also learn about these 2 warning signs we've spotted with Shanghai Industrial Holdings (including 1 which shouldn't be ignored).
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.