With a price-to-earnings (or "P/E") ratio of 4.1x CITIC Limited (HKG:267) may be sending very bullish signals at the moment, given that almost half of all companies in Hong Kong have P/E ratios greater than 10x and even P/E's higher than 20x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.
With earnings growth that's superior to most other companies of late, CITIC has been doing relatively well. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. 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 CITIC
What Are Growth Metrics Telling Us About The Low P/E?
The only time you'd be truly comfortable seeing a P/E as depressed as CITIC's is when the company's growth is on track to lag the market decidedly.
Taking a look back first, we see that the company managed to grow earnings per share by a handy 4.1% last year. Ultimately though, it couldn't turn around the poor performance of the prior period, with EPS shrinking 6.1% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 5.1% per year over the next three years. Meanwhile, the rest of the market is forecast to expand by 13% per year, which is noticeably more attractive.
With this information, we can see why CITIC is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.
The Final Word
While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
As we suspected, our examination of CITIC'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.
Having said that, be aware CITIC is showing 2 warning signs in our investment analysis, and 1 of those shouldn't be ignored.
You might be able to find a better investment than CITIC. 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.