The China Pipe Group Limited (HKG:380) share price has done very well over the last month, posting an excellent gain of 44%. The last 30 days bring the annual gain to a very sharp 69%.
Although its price has surged higher, China Pipe Group may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 2.5x, since almost half of all companies in Hong Kong have P/E ratios greater than 11x and even P/E's higher than 22x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.
Recent times have been quite advantageous for China Pipe Group as its earnings have been rising very briskly. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
See our latest analysis for China Pipe Group
What Are Growth Metrics Telling Us About The Low P/E?
China Pipe Group's P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 31% last year. Pleasingly, EPS has also lifted 34% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.
Comparing that to the market, which is predicted to deliver 21% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.
In light of this, it's understandable that China Pipe Group's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.
What We Can Learn From China Pipe Group's P/E?
Shares in China Pipe Group are going to need a lot more upward momentum to get the company's P/E out of its slump. 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.
We've established that China Pipe Group maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, 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 Pipe Group, and understanding should be part of your investment process.
If you're unsure about the strength of China Pipe Group's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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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.