There wouldn't be many who think Harbin Jiuzhou Group Co.,Ltd.'s (SZSE:300040) price-to-earnings (or "P/E") ratio of 26.5x is worth a mention when the median P/E in China is similar at about 28x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.
With earnings that are retreating more than the market's of late, Harbin Jiuzhou GroupLtd has been very sluggish. It might be that many expect the dismal earnings performance to revert back to market averages soon, which has kept the P/E from falling. You'd much rather the company wasn't bleeding earnings if you still believe in the business. Or at the very least, you'd be hoping it doesn't keep underperforming if your plan is to pick up some stock while it's not in favour.
Is There Some Growth For Harbin Jiuzhou GroupLtd?
The only time you'd be comfortable seeing a P/E like Harbin Jiuzhou GroupLtd's is when the company's growth is tracking the market closely.
Retrospectively, the last year delivered a frustrating 52% decrease to the company's bottom line. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 23% in total. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.
Shifting to the future, estimates from the lone analyst covering the company suggest earnings should grow by 213% over the next year. Meanwhile, the rest of the market is forecast to only expand by 42%, which is noticeably less attractive.
In light of this, it's curious that Harbin Jiuzhou GroupLtd's P/E sits in line with the majority of other companies. It may be that most investors aren't convinced the company can achieve future growth expectations.
The Bottom Line On Harbin Jiuzhou GroupLtd's P/E
While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
We've established that Harbin Jiuzhou GroupLtd currently trades on a lower than expected P/E since its forecast growth is higher than the wider market. There could be some unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. It appears some are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.
There are also other vital risk factors to consider and we've discovered 4 warning signs for Harbin Jiuzhou GroupLtd (1 is significant!) that you should be aware of before investing here.
You might be able to find a better investment than Harbin Jiuzhou GroupLtd. 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.