China Resources Land Limited's (HKG:1109) Shares Lagging The Market But So Is The Business

With a price-to-earnings (or "P/E") ratio of 4.8x China Resources Land Limited (HKG:1109) may be sending bullish signals at the moment, given that almost half of all companies in Hong Kong have P/E ratios greater than 9x and even P/E's higher than 18x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

China Resources Land 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 not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for China Resources Land

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

In order to justify its P/E ratio, China Resources Land would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered a decent 12% gain to the company's bottom line. The solid recent performance means it was also able to grow EPS by 5.2% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 1.8% per year over the next three years. That's shaping up to be materially lower than the 15% each year growth forecast for the broader market.

In light of this, it's understandable that China Resources Land's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Final Word

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that China Resources Land maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. 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.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for China Resources Land (1 is concerning) you should be aware of.

You might be able to find a better investment than China Resources Land. 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.