Earnings Working Against COFCO Capital Holdings Co., Ltd.'s (SZSE:002423) Share Price Following 28% Dive

COFCO Capital Holdings Co., Ltd. (SZSE:002423) shares have retraced a considerable 28% in the last month, reversing a fair amount of their solid recent performance. Of course, over the longer-term many would still wish they owned shares as the stock's price has soared 126% in the last twelve months.

After such a large drop in price, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 37x, you may consider COFCO Capital Holdings as an attractive investment with its 26.4x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

COFCO Capital Holdings 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. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. 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 COFCO Capital Holdings

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

Is There Any Growth For COFCO Capital Holdings?

The only time you'd be truly comfortable seeing a P/E as low as COFCO Capital Holdings' is when the company's growth is on track to lag the market.

Retrospectively, the last year delivered a decent 11% gain to the company's bottom line. The latest three year period has also seen a 20% overall rise in EPS, aided somewhat by its short-term performance. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Shifting to the future, estimates from the sole analyst covering the company suggest earnings should grow by 3.4% over the next year. That's shaping up to be materially lower than the 39% growth forecast for the broader market.

With this information, we can see why COFCO Capital Holdings is trading at a P/E lower than the market. 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 COFCO Capital Holdings' P/E?

The softening of COFCO Capital Holdings' shares means its P/E is now sitting at a pretty low level. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of COFCO Capital Holdings' 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. It's hard to see the share price rising strongly in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with COFCO Capital Holdings, and understanding these should be part of your investment process.

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.