Hisense Home Appliances Group Co., Ltd. (SZSE:000921) shares have continued their recent momentum with a 26% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 58%.
In spite of the firm bounce in price, Hisense Home Appliances Group may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 17.1x, since almost half of all companies in China have P/E ratios greater than 31x and even P/E's higher than 56x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.
Recent times have been advantageous for Hisense Home Appliances Group as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
Is There Any Growth For Hisense Home Appliances Group?
There's an inherent assumption that a company should underperform the market for P/E ratios like Hisense Home Appliances Group's to be considered reasonable.
Taking a look back first, we see that the company grew earnings per share by an impressive 99% last year. The strong recent performance means it was also able to grow EPS by 80% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.
Turning to the outlook, the next three years should generate growth of 14% per annum as estimated by the eleven analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 20% each year, which is noticeably more attractive.
In light of this, it's understandable that Hisense Home Appliances 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.
The Bottom Line On Hisense Home Appliances Group's P/E
Hisense Home Appliances Group's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
As we suspected, our examination of Hisense Home Appliances Group's 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. It's hard to see the share price rising strongly in the near future under these circumstances.
And what about other risks? Every company has them, and we've spotted 1 warning sign for Hisense Home Appliances Group you should know about.
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.