Shanghai Hi-Tech Control System Co., Ltd (SZSE:002184) shares have had a horrible month, losing 27% after a relatively good period beforehand. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 35% in that time.
Following the heavy fall in price, Shanghai Hi-Tech Control System may be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 23.9x, since almost half of all companies in China have P/E ratios greater than 30x and even P/E's higher than 54x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
With its earnings growth in positive territory compared to the declining earnings of most other companies, Shanghai Hi-Tech Control System has been doing quite well of late. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
Check out our latest analysis for Shanghai Hi-Tech Control System
Is There Any Growth For Shanghai Hi-Tech Control System?
The only time you'd be truly comfortable seeing a P/E as low as Shanghai Hi-Tech Control System's is when the company's growth is on track to lag the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 31% last year. The strong recent performance means it was also able to grow EPS by 40% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Looking ahead now, EPS is anticipated to climb by 65% during the coming year according to the only analyst following the company. Meanwhile, the rest of the market is forecast to only expand by 42%, which is noticeably less attractive.
With this information, we find it odd that Shanghai Hi-Tech Control System is trading at a P/E lower than the market. It looks like most investors are not convinced at all that the company can achieve future growth expectations.
The Final Word
Shanghai Hi-Tech Control System's recently weak share price has pulled its P/E below most other companies. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
Our examination of Shanghai Hi-Tech Control System's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.
You always need to take note of risks, for example - Shanghai Hi-Tech Control System has 2 warning signs we think you should be aware of.
It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).
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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.