China Life Insurance Company Limited's (HKG:2628) Share Price Boosted 30% But Its Business Prospects Need A Lift Too

China Life Insurance Company Limited (HKG:2628) shares have continued their recent momentum with a 30% gain in the last month alone. The annual gain comes to 129% following the latest surge, making investors sit up and take notice.

In spite of the firm bounce in price, China Life Insurance's price-to-earnings (or "P/E") ratio of 5.5x might still make it look like a strong buy right now compared to the market in Hong Kong, where around half of the companies have P/E ratios above 13x and even P/E's above 28x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

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With earnings growth that's superior to most other companies of late, China Life Insurance has been doing relatively well. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. 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 Life Insurance

Keen to find out how analysts think China Life Insurance's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Any Growth For China Life Insurance?

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

If we review the last year of earnings growth, the company posted a terrific increase of 135%. Pleasingly, EPS has also lifted 208% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to slump, contracting by 13% per year during the coming three years according to the twelve analysts following the company. That's not great when the rest of the market is expected to grow by 15% each year.

With this information, we are not surprised that China Life Insurance 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. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Key Takeaway

China Life Insurance's recent share price jump still sees its P/E sitting firmly flat on the ground. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that China Life Insurance maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. 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.

It is also worth noting that we have found 2 warning signs for China Life Insurance (1 can't be ignored!) that you need to take into consideration.

You might be able to find a better investment than China Life Insurance. 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).

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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.