Investors Holding Back On Hebei Huatong Wires and Cables Group Co., Ltd. (SHSE:605196)

Hebei Huatong Wires and Cables Group Co., Ltd.'s (SHSE:605196) price-to-earnings (or "P/E") ratio of 16.8x might make it look like a strong buy right now compared to the market in China, where around half of the companies have P/E ratios above 39x and even P/E's above 75x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Hebei Huatong Wires and Cables Group has been struggling lately as its earnings have declined faster than most other companies. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. 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.

Check out our latest analysis for Hebei Huatong Wires and Cables Group

Want the full picture on analyst estimates for the company? Then our free report on Hebei Huatong Wires and Cables Group will help you uncover what's on the horizon.

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

In order to justify its P/E ratio, Hebei Huatong Wires and Cables Group would need to produce anemic growth that's substantially trailing the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 8.7%. Even so, admirably EPS has lifted 186% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Turning to the outlook, the next year should generate growth of 42% as estimated by the only analyst watching the company. That's shaping up to be materially higher than the 37% growth forecast for the broader market.

With this information, we find it odd that Hebei Huatong Wires and Cables Group is trading at a P/E lower than the market. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

The Bottom Line On Hebei Huatong Wires and Cables Group's P/E

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Hebei Huatong Wires and Cables Group's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

Having said that, be aware Hebei Huatong Wires and Cables Group is showing 3 warning signs in our investment analysis, and 2 of those can't be ignored.

You might be able to find a better investment than Hebei Huatong Wires and Cables Group. 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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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.