Anhui Honglu Steel Construction(Group) CO., LTD's (SZSE:002541) Shares Bounce 28% But Its Business Still Trails 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 28% 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, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 39x, you may still consider Anhui Honglu Steel Construction(Group) as a highly attractive investment with its 14.6x P/E ratio. 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) has been struggling lately as its earnings have declined faster 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.

Check out our latest analysis for Anhui Honglu Steel Construction(Group)

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

The only time you'd be truly comfortable seeing a P/E as depressed as Anhui Honglu Steel Construction(Group)'s is when the company's growth is on track to lag the market decidedly.

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 20%. The last three years don't look nice either as the company has shrunk EPS by 16% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the nine analysts covering the company suggest earnings should grow by 14% over the next year. With the market predicted to deliver 37% growth , the company is positioned for a weaker earnings result.

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

Anhui Honglu Steel Construction(Group)'s recent share price jump still sees its P/E sitting firmly flat on the ground. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

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.

You need to take note of risks, for example - Anhui Honglu Steel Construction(Group) has 3 warning signs (and 1 which is concerning) we think you should know about.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.