When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") above 10x, you may consider China Coal Energy Company Limited (HKG:1898) as an attractive investment with its 6.6x 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 Coal Energy could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.
View our latest analysis for China Coal Energy
What Are Growth Metrics Telling Us About The Low P/E?
In order to justify its P/E ratio, China Coal Energy would need to produce sluggish growth that's trailing the market.
If we review the last year of earnings, the company posted a result that saw barely any deviation from a year ago. Fortunately, a few good years before that means that it was still able to grow EPS by 22% in total over the last three years. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.
Turning to the outlook, the next year should generate growth of 7.1% as estimated by the eight analysts watching the company. With the market predicted to deliver 23% growth , the company is positioned for a weaker earnings result.
In light of this, it's understandable that China Coal Energy'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 Key Takeaway
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 Coal Energy's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.
It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with China Coal Energy, and understanding should be part of your investment process.
If these risks are making you reconsider your opinion on China Coal Energy, explore our interactive list of high quality stocks to get an idea of what else is out there.
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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.