China Railway Signal & Communication Corporation Limited's (HKG:3969) Business Is Trailing The Market But Its Shares Aren't

There wouldn't be many who think China Railway Signal & Communication Corporation Limited's (HKG:3969) price-to-earnings (or "P/E") ratio of 9.7x is worth a mention when the median P/E in Hong Kong is similar at about 11x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

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China Railway Signal & Communication could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is moderate because investors think this poor earnings performance will turn around. If not, then existing shareholders may be a little nervous about the viability of the share price.

Check out our latest analysis for China Railway Signal & Communication

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

Is There Some Growth For China Railway Signal & Communication?

In order to justify its P/E ratio, China Railway Signal & Communication would need to produce growth that's similar to the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 4.5%. Regardless, EPS has managed to lift by a handy 9.2% in aggregate from three years ago, thanks to the earlier period of growth. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.

Turning to the outlook, the next three years should generate growth of 8.5% each year as estimated by the four analysts watching the company. That's shaping up to be materially lower than the 14% per annum growth forecast for the broader market.

In light of this, it's curious that China Railway Signal & Communication'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.

The Bottom Line On China Railway Signal & Communication's P/E

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.

Our examination of China Railway Signal & Communication'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.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for China Railway Signal & Communication that you should be aware of.

Of course, you might also be able to find a better stock than China Railway Signal & Communication. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.