Chengdu Hongqi Chain Co.,Ltd.'s (SZSE:002697) Share Price Boosted 31% But Its Business Prospects Need A Lift Too

Chengdu Hongqi Chain Co.,Ltd. (SZSE:002697) shares have continued their recent momentum with a 31% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 31%.

Even after such a large jump in price, Chengdu Hongqi ChainLtd's price-to-earnings (or "P/E") ratio of 17.6x might still 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 38x and even P/E's above 75x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

Chengdu Hongqi ChainLtd's negative earnings growth of late has neither been better nor worse than most other companies. 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. In saying that, existing shareholders may feel hopeful about the share price if the company's earnings continue tracking the market.

See our latest analysis for Chengdu Hongqi ChainLtd

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Chengdu Hongqi ChainLtd.

Does Growth Match The Low P/E?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Chengdu Hongqi ChainLtd's to be considered reasonable.

Taking a look back first, we see that there was hardly any earnings per share growth to speak of for the company over the past year. Still, the latest three year period was better as it's delivered a decent 21% overall rise in EPS. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

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.

With this information, we can see why Chengdu Hongqi ChainLtd 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

Shares in Chengdu Hongqi ChainLtd are going to need a lot more upward momentum to get the company's P/E out of its slump. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Chengdu Hongqi ChainLtd 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. It's hard to see the share price rising strongly in the near future under these circumstances.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Chengdu Hongqi ChainLtd that you should be aware 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.