Hangzhou Jiebai Group Co., Limited (SHSE:600814) Surges 29% Yet Its Low P/E Is No Reason For Excitement

Despite an already strong run, Hangzhou Jiebai Group Co., Limited (SHSE:600814) shares have been powering on, with a gain of 29% in the last thirty days. Taking a wider view, although not as strong as the last month, the full year gain of 16% is also fairly reasonable.

Even after such a large jump in price, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 38x, you may still consider Hangzhou Jiebai Group as an attractive investment with its 27x 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 limited.

For instance, Hangzhou Jiebai Group's receding earnings in recent times would have to be some food for thought. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. If you 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.

Check out our latest analysis for Hangzhou Jiebai Group

Although there are no analyst estimates available for Hangzhou Jiebai Group, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Any Growth For Hangzhou Jiebai Group?

Hangzhou Jiebai Group's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 2.2%. The last three years don't look nice either as the company has shrunk EPS by 30% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 38% shows it's an unpleasant look.

With this information, we are not surprised that Hangzhou Jiebai Group is trading at a P/E lower than the market. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Final Word

The latest share price surge wasn't enough to lift Hangzhou Jiebai Group's P/E close to the market median. 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 Hangzhou Jiebai Group maintains its low P/E on the weakness of its sliding earnings over the medium-term, 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. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Hangzhou Jiebai Group that you should be aware of.

You might be able to find a better investment than Hangzhou Jiebai 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.