Market Still Lacking Some Conviction On China Overseas Grand Oceans Group Limited (HKG:81)

When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") above 10x, you may consider China Overseas Grand Oceans Group Limited (HKG:81) as a highly attractive investment with its 2.9x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

With earnings that are retreating more than the market's of late, China Overseas Grand Oceans Group has been very sluggish. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. You'd much rather the company wasn't bleeding earnings if you still believe in the business. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.

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How Is China Overseas Grand Oceans Group's Growth Trending?

In order to justify its P/E ratio, China Overseas Grand Oceans Group would need to produce anemic growth that's substantially trailing the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 51%. As a result, earnings from three years ago have also fallen 38% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 14% each year as estimated by the ten analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 16% each year, which is not materially different.

In light of this, it's peculiar that China Overseas Grand Oceans Group's P/E sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting lower selling prices.

What We Can Learn From China Overseas Grand Oceans Group's P/E?

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.

We've established that China Overseas Grand Oceans Group currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. When we see an average earnings outlook with market-like growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

You should always think about risks. Case in point, we've spotted 3 warning signs for China Overseas Grand Oceans Group you should be aware of, and 1 of them shouldn't be ignored.

If these risks are making you reconsider your opinion on China Overseas Grand Oceans 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.