China Shenshan Orchard Holdings Co. Ltd. (SGX:BKV) shares have had a really impressive month, gaining 43% after a shaky period beforehand. Still, the 30-day jump doesn't change the fact that longer term shareholders have seen their stock decimated by the 63% share price drop in the last twelve months.
Although its price has surged higher, given about half the companies in Singapore have price-to-earnings ratios (or "P/E's") above 13x, you may still consider China Shenshan Orchard Holdings as a highly attractive investment with its 2.3x 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.
For instance, China Shenshan Orchard Holdings' receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. 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 China Shenshan Orchard Holdings
How Is China Shenshan Orchard Holdings' Growth Trending?
There's an inherent assumption that a company should far underperform the market for P/E ratios like China Shenshan Orchard Holdings' to be considered reasonable.
Retrospectively, the last year delivered a frustrating 24% decrease to the company's bottom line. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.
Comparing that to the market, which is predicted to deliver 9.2% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.
With this information, we can see why China Shenshan Orchard Holdings is trading at a P/E lower than the market. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.
The Final Word
Even after such a strong price move, China Shenshan Orchard Holdings' P/E still trails the rest of the market significantly. 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.
As we suspected, our examination of China Shenshan Orchard Holdings revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. 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 rising strongly in the near future under these circumstances.
Having said that, be aware China Shenshan Orchard Holdings is showing 3 warning signs in our investment analysis, and 2 of those are concerning.
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.