Investors Continue Waiting On Sidelines For China Railway Construction Heavy Industry Corporation Limited (SHSE:688425)

When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 32x, you may consider China Railway Construction Heavy Industry Corporation Limited (SHSE:688425) as a highly attractive investment with its 13.2x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

China Railway Construction Heavy Industry 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.

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How Is China Railway Construction Heavy Industry's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as depressed as China Railway Construction Heavy Industry's is when the company's growth is on track to lag the market decidedly.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 13%. The last three years don't look nice either as the company has shrunk EPS by 27% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 93% during the coming year according to the sole analyst following the company. That's shaping up to be materially higher than the 39% growth forecast for the broader market.

In light of this, it's peculiar that China Railway Construction Heavy Industry's P/E sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Bottom Line On China Railway Construction Heavy Industry's P/E

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that China Railway Construction Heavy Industry currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for China Railway Construction Heavy Industry that you should be aware of.

If you're unsure about the strength of China Railway Construction Heavy Industry's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.