Why Investors Shouldn't Be Surprised By PetroChina Company Limited's (HKG:857) Low P/E

When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") above 11x, you may consider PetroChina Company Limited (HKG:857) as an attractive investment with its 6.4x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

PetroChina's earnings growth of late has been pretty similar to most other companies. One possibility is that the P/E is low because investors think this modest earnings performance may begin to slide. If not, then existing shareholders have reason to be optimistic about the future direction of the share price.

Check out our latest analysis for PetroChina

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

Is There Any Growth For PetroChina?

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

Retrospectively, the last year delivered virtually the same number to the company's bottom line as the year before. However, a few strong years before that means that it was still able to grow EPS by an impressive 93% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 2.5% per year as estimated by the analysts watching the company. That's not great when the rest of the market is expected to grow by 12% each year.

With this information, we are not surprised that PetroChina 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. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

What We Can Learn From PetroChina's P/E?

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 PetroChina's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with PetroChina (at least 1 which can't be ignored), and understanding these should be part of your investment process.

You might be able to find a better investment than PetroChina. 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.