China Reinsurance (Group) Corporation's (HKG:1508) Price Is Right But Growth Is Lacking After Shares Rocket 31%

China Reinsurance (Group) Corporation (HKG:1508) shareholders would be excited to see that the share price has had a great month, posting a 31% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 31% in the last year.

In spite of the firm bounce in price, given about half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") above 9x, you may still consider China Reinsurance (Group) as a highly attractive investment with its 2.8x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

China Reinsurance (Group) certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. 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.

See our latest analysis for China Reinsurance (Group)

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Does Growth Match The Low P/E?

In order to justify its P/E ratio, China Reinsurance (Group) would need to produce anemic growth that's substantially trailing the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 174% last year. EPS has also lifted 29% in aggregate from three years ago, mostly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Shifting to the future, estimates from the three analysts covering the company suggest earnings growth is heading into negative territory, declining 2.8% per year over the next three years. With the market predicted to deliver 13% growth each year, that's a disappointing outcome.

With this information, we are not surprised that China Reinsurance (Group) is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Bottom Line On China Reinsurance (Group)'s P/E

China Reinsurance (Group)'s recent share price jump still sees its P/E sitting firmly flat on the ground. 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 Reinsurance (Group)'s analyst forecasts revealed that its outlook for shrinking earnings 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for China Reinsurance (Group) (2 are a bit concerning) you should be aware of.

Of course, you might also be able to find a better stock than China Reinsurance (Group). 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.