When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") above 10x, you may consider Yuexiu Property Company Limited (HKG:123) as an attractive investment with its 5x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Recent times have been pleasing for Yuexiu Property as its earnings have risen in spite of the market's earnings going into reverse. 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 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.

View our latest analysis for Yuexiu Property

How Is Yuexiu Property's Growth Trending?

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

Retrospectively, the last year delivered an exceptional 40% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 5.7% drop in EPS in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 0.4% per annum over the next three years. With the market predicted to deliver 16% growth per annum, the company is positioned for a weaker earnings result.

In light of this, it's understandable that Yuexiu Property's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Key Takeaway

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.

We've established that Yuexiu Property maintains its low P/E on the weakness of its forecast growth being lower than the wider market, 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. It's hard to see the share price rising strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 3 warning signs for Yuexiu Property you should be aware of, and 1 of them doesn't sit too well with us.

Of course, you might also be able to find a better stock than Yuexiu Property. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.