When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") above 10x, you may consider China Galaxy Securities Co., Ltd. (HKG:6881) as an attractive investment with its 5.7x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
China Galaxy Securities hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.
Is There Any Growth For China Galaxy Securities?
In order to justify its P/E ratio, China Galaxy Securities would need to produce sluggish growth that's trailing the market.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 3.7%. As a result, earnings from three years ago have also fallen 11% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Shifting to the future, estimates from the seven analysts covering the company suggest earnings should grow by 11% over the next year. That's shaping up to be materially lower than the 21% growth forecast for the broader market.
In light of this, it's understandable that China Galaxy Securities' 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.
The Key Takeaway
It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
As we suspected, our examination of China Galaxy Securities' analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
You should always think about risks. Case in point, we've spotted 3 warning signs for China Galaxy Securities you should be aware of, and 1 of them makes us a bit uncomfortable.
You might be able to find a better investment than China Galaxy Securities. 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.