Datang Group Holdings Limited (HKG:2117) Surges 26% Yet Its Low P/E Is No Reason For Excitement

The Datang Group Holdings Limited (HKG:2117) share price has done very well over the last month, posting an excellent gain of 26%. Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.

In spite of the firm bounce in price, Datang Group Holdings may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 6.7x, since almost half of all companies in Hong Kong have P/E ratios greater than 12x and even P/E's higher than 27x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Datang Group Holdings hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

View our latest analysis for Datang Group Holdings

Want the full picture on analyst estimates for the company? Then our free report on Datang Group Holdings will help you uncover what's on the horizon.

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 Datang Group Holdings' to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 22%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 24% overall rise in EPS. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.

Shifting to the future, estimates from the only analyst covering the company suggest earnings growth is heading into negative territory, declining 1.7% over the next year. That's not great when the rest of the market is expected to grow by 24%.

With this information, we are not surprised that Datang Group Holdings is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

What We Can Learn From Datang Group Holdings' P/E?

The latest share price surge wasn't enough to lift Datang Group Holdings' P/E close to the market median. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Datang Group Holdings' 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.

Before you take the next step, you should know about the 3 warning signs for Datang Group Holdings (2 are significant!) that we have uncovered.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a P/E below 20x.

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