Henan Yuguang Gold&Lead Co.,Ltd. (SHSE:600531) Shares Fly 41% But Investors Aren't Buying For Growth

Henan Yuguang Gold&Lead Co.,Ltd. (SHSE:600531) shareholders would be excited to see that the share price has had a great month, posting a 41% gain and recovering from prior weakness. Looking further back, the 20% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

In spite of the firm bounce in price, Henan Yuguang Gold&LeadLtd's price-to-earnings (or "P/E") ratio of 13.2x 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 34x and even P/E's above 64x 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.

Earnings have risen firmly for Henan Yuguang Gold&LeadLtd recently, which is pleasing to see. One possibility is that the P/E is low because investors think this respectable earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

View our latest analysis for Henan Yuguang Gold&LeadLtd

Although there are no analyst estimates available for Henan Yuguang Gold&LeadLtd, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Does Growth Match The Low P/E?

Henan Yuguang Gold&LeadLtd's P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

Retrospectively, the last year delivered an exceptional 18% gain to the company's bottom line. As a result, it also grew EPS by 20% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 37% shows it's noticeably less attractive on an annualised basis.

In light of this, it's understandable that Henan Yuguang Gold&LeadLtd's P/E sits below the majority of other companies. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Key Takeaway

Shares in Henan Yuguang Gold&LeadLtd are going to need a lot more upward momentum to get the company's P/E out of its slump. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Henan Yuguang Gold&LeadLtd revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

It is also worth noting that we have found 3 warning signs for Henan Yuguang Gold&LeadLtd (1 is concerning!) that you need to take into consideration.

Of course, you might also be able to find a better stock than Henan Yuguang Gold&LeadLtd. 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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