When close to half the companies in Hong Kong have price-to-earnings ratios (or “P/E’s”) above 12x, you may consider Anhui Conch Cement Company Limited (HKG:914) as an attractive investment with its 7.8x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it’s justified.
Recent times have been pleasing for Anhui Conch Cement as its earnings have risen in spite of the market’s earnings going into reverse. One possibility is that the P/E is low because investors think the company’s earnings are going to fall away like everyone else’s soon. 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.free report on Anhui Conch Cement.
Does Growth Match The Low P/E?
The only time you’d be truly comfortable seeing a P/E as low as Anhui Conch Cement’s is when the company’s growth is on track to lag the market.
Retrospectively, the last year delivered a decent 7.0% gain to the company’s bottom line. The latest three year period has also seen an excellent 189% overall rise in EPS, aided somewhat by its short-term performance. Therefore, it’s fair to say the earnings growth recently has been superb for the company.
Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 0.1% each year over the next three years. Meanwhile, the rest of the market is forecast to expand by 19% per annum, which is noticeably more attractive.
In light of this, it’s understandable that Anhui Conch Cement’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.
What We Can Learn From Anhui Conch Cement’s P/E?
It’s argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
We’ve established that Anhui Conch Cement 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.
We don’t want to rain on the parade too much, but we did also find 2 warning signs for Anhui Conch Cement (1 can’t be ignored!) that you need to be mindful of.
Of course, you might also be able to find a better stock than Anhui Conch Cement. So you may wish to see this free collection of other companies that sit on P/E’s below 20x and have grown earnings strongly.
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This article by Simply Wall St is general in nature. 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.
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