Chongqing Changan Automobile Company Limited's (SZSE:000625) Shares Lagging The Market But So Is The Business

With a price-to-earnings (or "P/E") ratio of 27.3x Chongqing Changan Automobile Company Limited (SZSE:000625) may be sending bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 37x and even P/E's higher than 71x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Chongqing Changan Automobile 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. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.

See our latest analysis for Chongqing Changan Automobile

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Chongqing Changan Automobile.

Does Growth Match The Low P/E?

In order to justify its P/E ratio, Chongqing Changan Automobile would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered a frustrating 55% decrease to the company's bottom line. Even so, admirably EPS has lifted 77% in aggregate from three years ago, notwithstanding the last 12 months. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 6.5% each year as estimated by the analysts watching the company. With the market predicted to deliver 21% growth each year, the company is positioned for a weaker earnings result.

With this information, we can see why Chongqing Changan Automobile is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Final Word

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Chongqing Changan Automobile 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.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Chongqing Changan Automobile (1 is a bit unpleasant!) that you need to be mindful of.

You might be able to find a better investment than Chongqing Changan Automobile. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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