When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") above 10x, you may consider China Railway Signal & Communication Corporation Limited (HKG:3969) as an attractive investment with its 6.9x 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.
There hasn't been much to differentiate China Railway Signal & Communication's and the market's retreating earnings lately. It might be that many expect the company's earnings performance to degrade further, which has repressed the P/E. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. At the very least, you'd be hoping that earnings don't fall off a cliff if your plan is to pick up some stock while it's out of favour.
View our latest analysis for China Railway Signal & Communication
How Is China Railway Signal & Communication's Growth Trending?
There's an inherent assumption that a company should underperform the market for P/E ratios like China Railway Signal & Communication's to be considered reasonable.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 2.9%. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.
Turning to the outlook, the next year should generate growth of 19% as estimated by the four analysts watching the company. With the market predicted to deliver 23% growth , the company is positioned for a weaker earnings result.
With this information, we can see why China Railway Signal & Communication is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.
What We Can Learn From China Railway Signal & Communication's P/E?
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.
We've established that China Railway Signal & Communication 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
It is also worth noting that we have found 1 warning sign for China Railway Signal & Communication that you need to take into consideration.
You might be able to find a better investment than China Railway Signal & Communication. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).
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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.