China Coal Energy Company Limited's (HKG:1898) Price Is Right But Growth Is Lacking

When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") above 10x, you may consider China Coal Energy Company Limited (HKG:1898) as an attractive investment with its 5.2x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

China Coal Energy has been struggling lately as its earnings have declined faster than most other companies. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. You'd much rather the company wasn't bleeding earnings if you still believe in the business. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.

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Is There Any Growth For China Coal Energy?

In order to justify its P/E ratio, China Coal Energy would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered a frustrating 26% decrease to the company's bottom line. Even so, admirably EPS has lifted 288% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Turning to the outlook, the next year should generate growth of 20% as estimated by the ten analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 23%, which is noticeably more attractive.

With this information, we can see why China Coal Energy 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 Bottom Line On China Coal Energy's P/E

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that China Coal Energy maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. 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.

Before you settle on your opinion, we've discovered 1 warning sign for China Coal Energy that you should be aware of.

If these risks are making you reconsider your opinion on China Coal Energy, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.