With a price-to-earnings (or "P/E") ratio of 6.6x China Everbright Environment Group Limited (HKG:257) may be sending bullish signals at the moment, given that 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. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
Our free stock report includes 3 warning signs investors should be aware of before investing in China Everbright Environment Group. Read for free now.China Everbright Environment Group hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. 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 Everbright Environment Group
How Is China Everbright Environment Group's Growth Trending?
There's an inherent assumption that a company should underperform the market for P/E ratios like China Everbright Environment Group's to be considered reasonable.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 24%. This means it has also seen a slide in earnings over the longer-term as EPS is down 50% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Looking ahead now, EPS is anticipated to climb by 9.0% per year during the coming three years according to the ten analysts following the company. Meanwhile, the rest of the market is forecast to expand by 14% per year, which is noticeably more attractive.
In light of this, it's understandable that China Everbright Environment Group's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.
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.
We've established that China Everbright Environment Group maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. 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.
You should always think about risks. Case in point, we've spotted 3 warning signs for China Everbright Environment Group you should be aware of, and 1 of them is significant.
If these risks are making you reconsider your opinion on China Everbright Environment Group, explore our interactive list of high quality stocks to get an idea of what else is out there.
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