CGN Mining Company Limited (HKG:1164) Stocks Pounded By 26% But Not Lagging Market On Growth Or Pricing

To the annoyance of some shareholders, CGN Mining Company Limited (HKG:1164) shares are down a considerable 26% in the last month, which continues a horrid run for the company. Still, a bad month hasn't completely ruined the past year with the stock gaining 86%, which is great even in a bull market.

Although its price has dipped substantially, given close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 8x, you may still consider CGN Mining as a stock to avoid entirely with its 25.8x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

CGN Mining could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

See our latest analysis for CGN Mining

Want the full picture on analyst estimates for the company? Then our free report on CGN Mining will help you uncover what's on the horizon.

What Are Growth Metrics Telling Us About The High P/E?

CGN Mining's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Retrospectively, the last year delivered a frustrating 8.9% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 178% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 42% per year as estimated by the nine analysts watching the company. That's shaping up to be materially higher than the 15% each year growth forecast for the broader market.

With this information, we can see why CGN Mining is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On CGN Mining's P/E

A significant share price dive has done very little to deflate CGN Mining's very lofty P/E. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that CGN Mining maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for CGN Mining that you should be aware of.

You might be able to find a better investment than CGN Mining. 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).

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

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.