There's No Escaping China Pacific Insurance (Group) Co., Ltd.'s (SHSE:601601) Muted Earnings Despite A 25% Share Price Rise

China Pacific Insurance (Group) Co., Ltd. (SHSE:601601) shareholders would be excited to see that the share price has had a great month, posting a 25% gain and recovering from prior weakness. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 13% in the last twelve months.

In spite of the firm bounce in price, China Pacific Insurance (Group) may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 9.7x, since almost half of all companies in China have P/E ratios greater than 33x and even P/E's higher than 62x 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.

China Pacific Insurance (Group) hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Check out our latest analysis for China Pacific Insurance (Group)

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Is There Any Growth For China Pacific Insurance (Group)?

There's an inherent assumption that a company should far underperform the market for P/E ratios like China Pacific Insurance (Group)'s to be considered reasonable.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 43%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 9.3% overall rise in EPS. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.

Shifting to the future, estimates from the eleven analysts covering the company suggest earnings should grow by 10.0% per year over the next three years. Meanwhile, the rest of the market is forecast to expand by 25% per annum, which is noticeably more attractive.

In light of this, it's understandable that China Pacific Insurance (Group)'s P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Key Takeaway

Shares in China Pacific Insurance (Group) are going to need a lot more upward momentum to get the company's P/E out of its slump. 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 China Pacific Insurance (Group)'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. 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 1 warning sign with China Pacific Insurance (Group), and understanding should be part of your investment process.

You might be able to find a better investment than China Pacific Insurance (Group). If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.