Despite an already strong run, Yankuang Energy Group Company Limited (HKG:1171) shares have been powering on, with a gain of 25% in the last thirty days.    The last 30 days bring the annual gain to a very sharp 31%.  

Although its price has surged higher, there still wouldn't be many who think Yankuang Energy Group's price-to-earnings (or "P/E") ratio of 7.9x is worth a mention when the median P/E in Hong Kong is similar at about 9x.  However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.  

Recent times haven't been advantageous for Yankuang Energy Group as its earnings have been falling quicker than most other companies.   One possibility is that the P/E is moderate because investors think the company's earnings trend will eventually fall in line with most others in the market.  If you still like the company, you'd want its earnings trajectory to turn around before making any decisions.  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.    

SEHK:1171 Price to Earnings Ratio vs Industry March 7th 2024

Keen to find out how analysts think Yankuang Energy Group's future stacks up against the industry? In that case, our free report is a great place to start.

What Are Growth Metrics Telling Us About The P/E?  

The only time you'd be comfortable seeing a P/E like Yankuang Energy Group's is when the company's growth is tracking the market closely.  

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 50%.   However, a few very strong years before that means that it was still able to grow EPS by an impressive 73% in total over the last three years.  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.  

Shifting to the future, estimates from the ten analysts covering the company suggest earnings should grow by 8.1% each year over the next three years.  Meanwhile, the rest of the market is forecast to expand by 16% per year, which is noticeably more attractive.

In light of this, it's curious that Yankuang Energy Group's P/E sits in line with the majority of other companies.  Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now.  These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.  

What We Can Learn From Yankuang Energy Group's P/E?

Yankuang Energy Group appears to be back in favour with a solid price jump getting its P/E back in line with most other companies.      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.

Our examination of Yankuang Energy Group's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted.  Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long.  This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.    

We don't want to rain on the parade too much, but we did also find 3 warning signs for Yankuang Energy Group that you need to be mindful of.  

You might be able to find a better investment than Yankuang Energy Group. 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).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.