Anhui Honglu Steel Construction(Group) CO., LTD (SZSE:002541) Held Back By Insufficient Growth Even After Shares Climb 44%

Anhui Honglu Steel Construction(Group) CO., LTD (SZSE:002541) shares have had a really impressive month, gaining 44% after a shaky period beforehand. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 39% over that time.

Although its price has surged higher, Anhui Honglu Steel Construction(Group) may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 10.8x, since almost half of all companies in China have P/E ratios greater than 34x and even P/E's higher than 64x 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.

Recent times haven't been advantageous for Anhui Honglu Steel Construction(Group) as its earnings have been falling quicker than most other companies. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.

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Is There Any Growth For Anhui Honglu Steel Construction(Group)?

In order to justify its P/E ratio, Anhui Honglu Steel Construction(Group) would need to produce anemic growth that's substantially trailing the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 12%. As a result, earnings from three years ago have also fallen 6.2% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 10% per year as estimated by the ten analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 19% per year, which is noticeably more attractive.

With this information, we can see why Anhui Honglu Steel Construction(Group) is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Key Takeaway

Even after such a strong price move, Anhui Honglu Steel Construction(Group)'s P/E still trails the rest of the market significantly. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Anhui Honglu Steel Construction(Group)'s 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.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Anhui Honglu Steel Construction(Group) (1 is a bit concerning) you should be aware of.

If these risks are making you reconsider your opinion on Anhui Honglu Steel Construction(Group), explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.