Improved Earnings Required Before China Galaxy Securities Co., Ltd. (HKG:6881) Shares Find Their Feet

With a price-to-earnings (or "P/E") ratio of 6.7x China Galaxy Securities Co., Ltd. (HKG:6881) may be sending bullish signals at the moment, given that almost half of all companies in Hong Kong have P/E ratios greater than 10x and even P/E's higher than 19x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

China Galaxy Securities 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.

View our latest analysis for China Galaxy Securities

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

How Is China Galaxy Securities' Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like China Galaxy Securities' to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 26%. The last three years don't look nice either as the company has shrunk EPS by 22% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the nine analysts covering the company suggest earnings should grow by 8.2% each year over the next three years. With the market predicted to deliver 16% growth per annum, the company is positioned for a weaker earnings result.

With this information, we can see why China Galaxy Securities is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Key Takeaway

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.

As we suspected, our examination of China Galaxy Securities' analyst forecasts revealed that its inferior earnings outlook 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. It's hard to see the share price rising strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 2 warning signs for China Galaxy Securities you should know about.

Of course, you might also be able to find a better stock than China Galaxy Securities. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com