Chengdu Hongqi Chain Co.,Ltd. (SZSE:002697) Surges 31% Yet Its Low P/E Is No Reason For Excitement

Chengdu Hongqi Chain Co.,Ltd. (SZSE:002697) shares have continued their recent momentum with a 31% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 31% in the last year.

Although its price has surged higher, Chengdu Hongqi ChainLtd may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 17.6x, since almost half of all companies in China have P/E ratios greater than 38x and even P/E's higher than 75x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

There hasn't been much to differentiate Chengdu Hongqi ChainLtd's and the market's retreating earnings lately. One possibility is that the P/E is low because investors think the company's earnings may begin to slide even faster. You'd much rather the company wasn't bleeding earnings if you still believe in the business. At the very least, you'd be hoping that earnings don't fall off a cliff if your plan is to pick up some stock while it's out of favour.

Check out our latest analysis for Chengdu Hongqi ChainLtd

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

In order to justify its P/E ratio, Chengdu Hongqi ChainLtd would need to produce anemic growth that's substantially trailing the market.

If we review the last year of earnings, the company posted a result that saw barely any deviation from a year ago. Regardless, EPS has managed to lift by a handy 21% in aggregate from three years ago, thanks to the earlier period of growth. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Shifting to the future, estimates from the five analysts covering the company suggest earnings should grow by 11% over the next year. Meanwhile, the rest of the market is forecast to expand by 38%, which is noticeably more attractive.

In light of this, it's understandable that Chengdu Hongqi ChainLtd's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Key Takeaway

Even after such a strong price move, Chengdu Hongqi ChainLtd's P/E still trails the rest of the market significantly. 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.

As we suspected, our examination of Chengdu Hongqi ChainLtd's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. 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.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Chengdu Hongqi ChainLtd that you need to be mindful of.

Of course, you might also be able to find a better stock than Chengdu Hongqi ChainLtd. 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.