When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") above 10x, you may consider China Energy Engineering Corporation Limited (HKG:3996) as a highly attractive investment with its 4.3x 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 so limited.
As an illustration, earnings have deteriorated at China Energy Engineering over the last year, which is not ideal at all. It might be that many expect the disappointing earnings performance to continue or accelerate, 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.
Check out our latest analysis for China Energy Engineering
Does Growth Match The Low P/E?
The only time you'd be truly comfortable seeing a P/E as depressed as China Energy Engineering's is when the company's growth is on track to lag the market decidedly.
Retrospectively, the last year delivered a frustrating 3.1% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 64% overall rise in EPS, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.
This is in contrast to the rest of the market, which is expected to grow by 23% over the next year, materially higher than the company's recent medium-term annualised growth rates.
With this information, we can see why China Energy Engineering is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.
The Bottom Line On China Energy Engineering's P/E
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 China Energy Engineering maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. 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 Energy Engineering is showing 2 warning signs in our investment analysis, and 1 of those is a bit unpleasant.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on 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.