The China Gas Industry Investment Holdings Co. Ltd. (HKG:1940) share price has fared very poorly over the last month, falling by a substantial 27%. The last month has meant the stock is now only up 8.0% during the last year.
Although its price has dipped substantially, given about half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") above 10x, you may still consider China Gas Industry Investment Holdings as a highly attractive investment with its 4.1x 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.
The earnings growth achieved at China Gas Industry Investment Holdings over the last year would be more than acceptable for most companies. It might be that many expect the respectable earnings performance to degrade substantially, 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.
What Are Growth Metrics Telling Us About The Low P/E?
In order to justify its P/E ratio, China Gas Industry Investment Holdings would need to produce anemic growth that's substantially trailing the market.
Taking a look back first, we see that the company managed to grow earnings per share by a handy 14% last year. Still, EPS has barely risen at all in aggregate from three years ago, which is not ideal. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.
Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 21% shows it's noticeably less attractive on an annualised basis.
In light of this, it's understandable that China Gas Industry Investment Holdings' P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.
The Bottom Line On China Gas Industry Investment Holdings' P/E
China Gas Industry Investment Holdings' P/E looks about as weak as its stock price lately. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
As we suspected, our examination of China Gas Industry Investment Holdings revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.
Don't forget that there may be other risks. For instance, we've identified 2 warning signs for China Gas Industry Investment Holdings that you should be aware of.
If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
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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.