CMOC Group Limited's (HKG:3993) Shares Climb 26% But Its Business Is Yet to Catch Up

CMOC Group Limited (HKG:3993) shareholders have had their patience rewarded with a 26% share price jump in the last month. Looking further back, the 12% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Although its price has surged higher, there still wouldn't be many who think CMOC Group's price-to-earnings (or "P/E") ratio of 10.1x is worth a mention when the median P/E in Hong Kong is similar at about 11x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

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CMOC 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 wane, which has kept the P/E from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

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Does Growth Match The P/E?

The only time you'd be comfortable seeing a P/E like CMOC Group's is when the company's growth is tracking the market closely.

Retrospectively, the last year delivered an exceptional 53% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 160% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 5.6% each year over the next three years. Meanwhile, the rest of the market is forecast to expand by 14% each year, which is noticeably more attractive.

In light of this, it's curious that CMOC Group's P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

What We Can Learn From CMOC Group's P/E?

Its shares have lifted substantially and now CMOC Group's P/E is also back up to the market median. 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.

Our examination of CMOC Group's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Having said that, be aware CMOC Group is showing 1 warning sign in our investment analysis, you should know about.

If these risks are making you reconsider your opinion on CMOC Group, 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.