The Market Doesn't Like What It Sees From China Vanke Co., Ltd.'s (SZSE:000002) Earnings Yet

With a price-to-earnings (or "P/E") ratio of 7.8x China Vanke Co., Ltd. (SZSE:000002) 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. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

China Vanke could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

See our latest analysis for China Vanke

If you'd like to see what analysts are forecasting going forward, you should check out our free report on China Vanke.

Is There Any Growth For China Vanke?

There's an inherent assumption that a company should far underperform the market for P/E ratios like China Vanke'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 55%. This means it has also seen a slide in earnings over the longer-term as EPS is down 76% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 1.9% per year as estimated by the analysts watching the company. That's not great when the rest of the market is expected to grow by 24% per annum.

In light of this, it's understandable that China Vanke's P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Final Word

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that China Vanke maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with China Vanke (at least 2 which don't sit too well with us), and understanding these should be part of your investment process.

You might be able to find a better investment than China Vanke. 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.