Getting In Cheap On CNNC Hua Yuan Titanium Dioxide Co., Ltd (SZSE:002145) Is Unlikely

With a price-to-earnings (or "P/E") ratio of 46.3x CNNC Hua Yuan Titanium Dioxide Co., Ltd (SZSE:002145) may be sending very bearish signals at the moment, given that almost half of all companies in China have P/E ratios under 29x and even P/E's lower than 18x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

As an illustration, earnings have deteriorated at CNNC Hua Yuan Titanium Dioxide over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

View our latest analysis for CNNC Hua Yuan Titanium Dioxide

Although there are no analyst estimates available for CNNC Hua Yuan Titanium Dioxide, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is CNNC Hua Yuan Titanium Dioxide's Growth Trending?

There's an inherent assumption that a company should far outperform the market for P/E ratios like CNNC Hua Yuan Titanium Dioxide's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 63%. As a result, earnings from three years ago have also fallen 55% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

In contrast to the company, the rest of the market is expected to grow by 41% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's alarming that CNNC Hua Yuan Titanium Dioxide's P/E sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Final Word

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.

Our examination of CNNC Hua Yuan Titanium Dioxide revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You need to take note of risks, for example - CNNC Hua Yuan Titanium Dioxide has 4 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

If you're unsure about the strength of CNNC Hua Yuan Titanium Dioxide's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.