Getting In Cheap On China Resources Gas Group Limited (HKG:1193) Might Be Difficult

When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 12x, you may consider China Resources Gas Group Limited (HKG:1193) as a stock to potentially avoid with its 15.3x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

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China Resources Gas Group 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 high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

View our latest analysis for China Resources Gas Group

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

How Is China Resources Gas Group's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as high as China Resources Gas Group's is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered a frustrating 41% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 52% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next three years should generate growth of 16% each year as estimated by the analysts watching the company. With the market only predicted to deliver 13% per year, the company is positioned for a stronger earnings result.

In light of this, it's understandable that China Resources Gas Group's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

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.

As we suspected, our examination of China Resources Gas Group's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

You should always think about risks. Case in point, we've spotted 2 warning signs for China Resources Gas Group you should be aware of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.