Poly Developments and Holdings Group Co., Ltd. (SHSE:600048) Might Not Be As Mispriced As It Looks

Poly Developments and Holdings Group Co., Ltd.'s (SHSE:600048) price-to-earnings (or "P/E") ratio of 15.4x might make it look like a strong buy right now compared to the market in China, where around half of the companies have P/E ratios above 33x and even P/E's above 64x are quite common. 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.

Poly Developments and Holdings Group has been struggling lately as its earnings have declined faster than most other companies. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. 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.

See our latest analysis for Poly Developments and Holdings Group

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Poly Developments and Holdings Group.

Does Growth Match The Low P/E?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Poly Developments and Holdings Group's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 64% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 77% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next year should generate growth of 70% as estimated by the analysts watching the company. That's shaping up to be materially higher than the 38% growth forecast for the broader market.

With this information, we find it odd that Poly Developments and Holdings Group is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Final Word

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.

We've established that Poly Developments and Holdings Group currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

You should always think about risks. Case in point, we've spotted 3 warning signs for Poly Developments and Holdings Group you should be aware of, and 1 of them makes us a bit uncomfortable.

If these risks are making you reconsider your opinion on Poly Developments and Holdings 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.