China Overseas Land & Investment Limited (HKG:688) Stock Catapults 32% Though Its Price And Business Still Lag The Market

China Overseas Land & Investment Limited (HKG:688) shares have had a really impressive month, gaining 32% after a shaky period beforehand. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 5.2% in the last twelve months.

Although its price has surged higher, China Overseas Land & Investment may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 6.8x, since almost half of all companies in Hong Kong have P/E ratios greater than 10x and even P/E's higher than 19x 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.

Recent times have been advantageous for China Overseas Land & Investment as its earnings have been rising faster than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. 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 Overseas Land & Investment

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

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

There's an inherent assumption that a company should underperform the market for P/E ratios like China Overseas Land & Investment's to be considered reasonable.

Retrospectively, the last year delivered a decent 12% gain to the company's bottom line. Still, lamentably EPS has fallen 49% in aggregate from three years ago, which is disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 8.7% each year as estimated by the analysts watching the company. That's shaping up to be materially lower than the 12% per annum growth forecast for the broader market.

With this information, we can see why China Overseas Land & Investment is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Key Takeaway

Despite China Overseas Land & Investment's shares building up a head of steam, its P/E still lags most other companies. 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.

We've established that China Overseas Land & Investment 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.

Before you take the next step, you should know about the 1 warning sign for China Overseas Land & Investment that we have uncovered.

You might be able to find a better investment than China Overseas Land & Investment. 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.