Little Excitement Around China Merchants Expressway Network & Technology Holdings Co.,Ltd.'s (SZSE:001965) Earnings

China Merchants Expressway Network & Technology Holdings Co.,Ltd.'s (SZSE:001965) price-to-earnings (or "P/E") ratio of 13.4x 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 39x and even P/E's above 77x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

China Merchants Expressway Network & Technology HoldingsLtd certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for China Merchants Expressway Network & Technology HoldingsLtd

If you'd like to see what analysts are forecasting going forward, you should check out our free report on China Merchants Expressway Network & Technology HoldingsLtd.

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 China Merchants Expressway Network & Technology HoldingsLtd's to be considered reasonable.

If we review the last year of earnings growth, the company posted a worthy increase of 9.8%. The solid recent performance means it was also able to grow EPS by 25% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Looking ahead now, EPS is anticipated to slump, contracting by 7.0% during the coming year according to the four analysts following the company. That's not great when the rest of the market is expected to grow by 37%.

With this information, we are not surprised that China Merchants Expressway Network & Technology HoldingsLtd is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Final Word

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.

As we suspected, our examination of China Merchants Expressway Network & Technology HoldingsLtd's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

You need to take note of risks, for example - China Merchants Expressway Network & Technology HoldingsLtd has 2 warning signs (and 1 which is potentially serious) we think you should know about.

Of course, you might also be able to find a better stock than China Merchants Expressway Network & Technology HoldingsLtd. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.