There Is A Reason Aluminum Corporation of China Limited's (HKG:2600) Price Is Undemanding

Aluminum Corporation of China Limited's (HKG:2600) price-to-earnings (or "P/E") ratio of 7x might make it look like a buy right now compared to the market in Hong Kong, where around half of the companies have P/E ratios above 12x and even P/E's above 27x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

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Recent times have been advantageous for Aluminum Corporation of China as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

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

The only time you'd be truly comfortable seeing a P/E as low as Aluminum Corporation of China's is when the company's growth is on track to lag the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 93% last year. Pleasingly, EPS has also lifted 104% 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.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 0.07% each year as estimated by the twelve analysts watching the company. With the market predicted to deliver 15% growth per year, that's a disappointing outcome.

With this information, we are not surprised that Aluminum Corporation of China 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 Aluminum Corporation of China'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 Aluminum Corporation of China'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.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Aluminum Corporation of China with six simple checks on some of these key factors.

If you're unsure about the strength of Aluminum Corporation of China's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.