When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") above 10x, you may consider Sinopharm Group Co. Ltd. (HKG:1099) as an attractive investment with its 6.7x 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.
Sinopharm Group certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. 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.
Check out our latest analysis for Sinopharm Group
Does Growth Match The Low P/E?
There's an inherent assumption that a company should underperform the market for P/E ratios like Sinopharm Group's to be considered reasonable.
Retrospectively, the last year delivered a decent 11% gain to the company's bottom line. EPS has also lifted 27% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing earnings over that time.
Turning to the outlook, the next year should generate growth of 14% as estimated by the analysts watching the company. That's shaping up to be materially lower than the 22% growth forecast for the broader market.
In light of this, it's understandable that Sinopharm Group'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.
What We Can Learn From Sinopharm Group's P/E?
Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
As we suspected, our examination of Sinopharm Group's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. 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.
The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Sinopharm Group with six simple checks on some of these key factors.
If you're unsure about the strength of Sinopharm Group's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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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.