China Merchants Securities Co., Ltd.'s (SHSE:600999) Shares Bounce 33% But Its Business Still Trails The Market

China Merchants Securities Co., Ltd. (SHSE:600999) shares have continued their recent momentum with a 33% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 39%.

In spite of the firm bounce in price, China Merchants Securities may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 20.6x, since almost half of all companies in China have P/E ratios greater than 30x and even P/E's higher than 58x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

China Merchants Securities certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, 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.

Check out our latest analysis for China Merchants Securities

Keen to find out how analysts think China Merchants Securities' future stacks up against the industry? In that case, our free report is a great place to start.

How Is China Merchants Securities' Growth Trending?

In order to justify its P/E ratio, China Merchants Securities would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered a decent 3.5% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen an unpleasant 20% overall drop in EPS. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next three years should generate growth of 8.8% per year as estimated by the eight analysts watching the company. With the market predicted to deliver 19% growth per annum, the company is positioned for a weaker earnings result.

In light of this, it's understandable that China Merchants Securities' 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 China Merchants Securities' P/E?

The latest share price surge wasn't enough to lift China Merchants Securities' P/E close to the market median. 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 China Merchants Securities 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with China Merchants Securities, and understanding should be part of your investment process.

Of course, you might also be able to find a better stock than China Merchants Securities. 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.