There’s No Escaping CNOOC Limited’s (HKG:883) Muted Earnings

When close to half the companies in Hong Kong have price-to-earnings ratios (or “P/E’s”) above 12x, you may consider CNOOC Limited (HKG:883) as an attractive investment with its 8.3x P/E ratio. Although, it’s not wise to just take the P/E at face value as there may be an explanation why it’s limited.

CNOOC has been struggling lately as its earnings have declined faster than most other companies. The P/E is probably low because investors think this poor earnings performance isn’t going to improve at all. You’d much rather the company wasn’t bleeding earnings if you still believe in the business. Or at the very least, you’d be hoping the earnings slide doesn’t get any worse if your plan is to pick up some stock while it’s out of favour.

See our latest analysis for CNOOC

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SEHK:883 Price Based on Past Earnings September 3rd 2020
Keen to find out how analysts think CNOOC’s future stacks up against the industry? In that case, our free report is a great place to start.

What Are Growth Metrics Telling Us About The Low P/E?

There’s an inherent assumption that a company should underperform the market for P/E ratios like CNOOC’s to be considered reasonable.

Retrospectively, the last year delivered a frustrating 28% decrease to the company’s bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 67% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 16% each year over the next three years. With the market predicted to deliver 19% growth per year, the company is positioned for a weaker earnings result.

With this information, we can see why CNOOC 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.

What We Can Learn From CNOOC’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 CNOOC maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn’t great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Before you take the next step, you should know about the 1 warning sign for CNOOC that we have uncovered.

If these risks are making you reconsider your opinion on CNOOC, explore our interactive list of high quality stocks to get an idea of what else is out there.

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