When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 34x, you may consider Shandong Mining Machinery Group Co., Ltd. (SZSE:002526) as an attractive investment with its 26.5x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Shandong Mining Machinery Group certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

See our latest analysis for Shandong Mining Machinery Group

What Are Growth Metrics Telling Us About The Low P/E?

There's an inherent assumption that a company should underperform the market for P/E ratios like Shandong Mining Machinery Group's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 208%. Still, incredibly EPS has fallen 14% 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.

In contrast to the company, the rest of the market is expected to grow by 43% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we are not surprised that Shandong Mining Machinery Group is trading at a P/E lower than the market. 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

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Shandong Mining Machinery Group maintains its low P/E on the weakness of its sliding earnings over the medium-term, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. 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 2 warning signs for Shandong Mining Machinery Group that we have uncovered.

If these risks are making you reconsider your opinion on Shandong Mining Machinery Group, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.