Anhui Honglu Steel Construction(Group) CO., LTD (SZSE:002541) Looks Inexpensive But Perhaps Not Attractive Enough

With a price-to-earnings (or "P/E") ratio of 7.6x Anhui Honglu Steel Construction(Group) CO., LTD (SZSE:002541) may be sending very bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 28x and even P/E's higher than 53x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

Anhui Honglu Steel Construction(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.

View our latest analysis for Anhui Honglu Steel Construction(Group)

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How Is Anhui Honglu Steel Construction(Group)'s Growth Trending?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 1.5%. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 24% in total. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.

Shifting to the future, estimates from the eleven analysts covering the company suggest earnings should grow by 10% per year over the next three years. That's shaping up to be materially lower than the 24% each year growth forecast for the broader market.

In light of this, it's understandable that Anhui Honglu Steel Construction(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.

What We Can Learn From Anhui Honglu Steel Construction(Group)'s P/E?

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

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.

Before you settle on your opinion, we've discovered 3 warning signs for Anhui Honglu Steel Construction(Group) (1 shouldn't be ignored!) that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.