China State Construction Development Holdings Limited's (HKG:830) price-to-earnings (or "P/E") ratio of 4.9x might 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 11x and even P/E's above 21x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.
China State Construction Development Holdings certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
See our latest analysis for China State Construction Development Holdings
Is There Any Growth For China State Construction Development Holdings?
In order to justify its P/E ratio, China State Construction Development Holdings would need to produce anemic growth that's substantially trailing the market.
Retrospectively, the last year delivered a decent 12% gain to the company's bottom line. Pleasingly, EPS has also lifted 113% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Looking ahead now, EPS is anticipated to climb by 16% per year during the coming three years according to the four analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 14% per year, which is noticeably less attractive.
In light of this, it's peculiar that China State Construction Development Holdings' P/E sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.
What We Can Learn From China State Construction Development Holdings' P/E?
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.
Our examination of China State Construction Development Holdings' analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.
Plus, you should also learn about this 1 warning sign we've spotted with China State Construction Development Holdings .
If you're unsure about the strength of China State Construction Development Holdings' 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.