When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 31x, you may consider Shenzhen Zhongjin Lingnan Nonfemet Co. Ltd. (SZSE:000060) as an attractive investment with its 19.3x 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.
Shenzhen Zhongjin Lingnan Nonfemet could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.
How Is Shenzhen Zhongjin Lingnan Nonfemet's Growth Trending?
There's an inherent assumption that a company should underperform the market for P/E ratios like Shenzhen Zhongjin Lingnan Nonfemet's to be considered reasonable.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 28%. This means it has also seen a slide in earnings over the longer-term as EPS is down 1.6% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
Looking ahead now, EPS is anticipated to climb by 52% during the coming year according to the dual analysts following the company. With the market only predicted to deliver 39%, the company is positioned for a stronger earnings result.
With this information, we find it odd that Shenzhen Zhongjin Lingnan Nonfemet is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.
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 Shenzhen Zhongjin Lingnan Nonfemet currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.
You should always think about risks. Case in point, we've spotted 3 warning signs for Shenzhen Zhongjin Lingnan Nonfemet you should be aware of, and 1 of them shouldn't be ignored.
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).
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.