Anhui Honglu Steel Construction(Group) CO., LTD (SZSE:002541) Stock Catapults 26% Though Its Price And Business Still Lag The Market

Anhui Honglu Steel Construction(Group) CO., LTD (SZSE:002541) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 41% over that time.

In spite of the firm bounce in price, 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 11x, since almost half of all companies in China have P/E ratios greater than 31x and even P/E's higher than 58x 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.

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. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

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

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What Are Growth Metrics Telling Us About The Low P/E?

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.

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 1.5%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 24% 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.

Turning to the outlook, the next three years should generate growth of 12% each year as estimated by the analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 20% per year, which is noticeably more attractive.

In light of this, it's understandable that Anhui Honglu Steel Construction(Group)'s P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

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. 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.

We've established that Anhui Honglu Steel Construction(Group) maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. 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.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Anhui Honglu Steel Construction(Group) (of which 1 is concerning!) you should know about.

You might be able to find a better investment than Anhui Honglu Steel Construction(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.