Insufficient Growth At Chengdu Hongqi Chain Co.,Ltd. (SZSE:002697) Hampers Share Price

Chengdu Hongqi Chain Co.,Ltd.'s (SZSE:002697) price-to-earnings (or "P/E") ratio of 12.4x 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 32x and even P/E's above 59x are quite common. 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.

Chengdu Hongqi ChainLtd certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

View 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.

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

The only time you'd be truly comfortable seeing a P/E as depressed as Chengdu Hongqi ChainLtd's is when the company's growth is on track to lag the market decidedly.

If we review the last year of earnings growth, the company posted a worthy increase of 14%. The solid recent performance means it was also able to grow EPS by 12% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 6.5% per annum as estimated by the six analysts watching the company. That's shaping up to be materially lower than the 20% per year growth forecast for the broader market.

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.

What We Can Learn From Chengdu Hongqi ChainLtd's P/E?

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

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. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Chengdu Hongqi ChainLtd that you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.