Despite an already strong run, China Boqi Environmental (Holding) Co., Ltd. (HKG:2377) shares have been powering on, with a gain of 51% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 39% in the last year.
Even after such a large jump in price, China Boqi Environmental (Holding)'s price-to-earnings (or "P/E") ratio of 4.3x might still make it look like a strong buy right now compared to the market in Hong Kong, where around half of the companies have P/E ratios above 10x and even P/E's above 20x are quite common. 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.
For instance, China Boqi Environmental (Holding)'s receding earnings in recent times would have to be some food for thought. It might be that many expect the disappointing earnings performance to continue or accelerate, 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.
Check out our latest analysis for China Boqi Environmental (Holding)
Does Growth Match The Low P/E?
There's an inherent assumption that a company should far underperform the market for P/E ratios like China Boqi Environmental (Holding)'s to be considered reasonable.
Retrospectively, the last year delivered a frustrating 22% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 18% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 22% shows it's an unpleasant look.
In light of this, it's understandable that China Boqi Environmental (Holding)'s P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.
The Key Takeaway
Even after such a strong price move, China Boqi Environmental (Holding)'s P/E still trails the rest of the market significantly. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
As we suspected, our examination of China Boqi Environmental (Holding) revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.
It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with China Boqi Environmental (Holding), and understanding them should be part of your investment process.
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.