Improved Earnings Required Before Chow Tai Seng Jewellery Co., Ltd. (SZSE:002867) Shares Find Their Feet

With a price-to-earnings (or "P/E") ratio of 11x Chow Tai Seng Jewellery Co., Ltd. (SZSE:002867) may be sending very bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 29x and even P/E's higher than 54x 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 so limited.

With earnings growth that's superior to most other companies of late, Chow Tai Seng Jewellery has been doing relatively well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Chow Tai Seng Jewellery

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Does Growth Match The Low P/E?

Chow Tai Seng Jewellery's P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

If we review the last year of earnings growth, the company posted a worthy increase of 9.4%. The solid recent performance means it was also able to grow EPS by 13% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 13% per year during the coming three years according to the ten analysts following the company. That's shaping up to be materially lower than the 25% per annum growth forecast for the broader market.

With this information, we can see why Chow Tai Seng Jewellery 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 Key Takeaway

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.

We've established that Chow Tai Seng Jewellery 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Having said that, be aware Chow Tai Seng Jewellery is showing 2 warning signs in our investment analysis, and 1 of those is significant.

Of course, you might also be able to find a better stock than Chow Tai Seng Jewellery. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com