A Piece Of The Puzzle Missing From China Pipe Group Limited's (HKG:380) 27% Share Price Climb

China Pipe Group Limited (HKG:380) shares have continued their recent momentum with a 27% gain in the last month alone. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 7.3% in the last twelve months.

In spite of the firm bounce in price, China Pipe Group may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 2.4x, since almost half of all companies in Hong Kong have P/E ratios greater than 10x and even P/E's higher than 18x 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.

For instance, China Pipe Group's receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. 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 China Pipe Group

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on China Pipe Group's earnings, revenue and cash flow.

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 Pipe Group's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 26%. Even so, admirably EPS has lifted 115% in aggregate from three years ago, notwithstanding the last 12 months. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 22% shows it's noticeably more attractive on an annualised basis.

In light of this, it's peculiar that China Pipe Group's P/E sits below the majority of other companies. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

What We Can Learn From China Pipe Group's P/E?

Shares in China Pipe Group are going to need a lot more upward momentum to get the company's P/E out of its slump. 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 China Pipe Group currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

Plus, you should also learn about these 2 warning signs we've spotted with China Pipe Group.

If you're unsure about the strength of China Pipe Group's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.