Not Many Are Piling Into CGN New Energy Holdings Co., Ltd. (HKG:1811) Just Yet

With a price-to-earnings (or "P/E") ratio of 5.1x CGN New Energy Holdings Co., Ltd. (HKG:1811) may be sending bullish signals at the moment, given that 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.

CGN New Energy Holdings has been struggling lately as its earnings have declined faster than most other companies. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. You'd much rather the company wasn't bleeding earnings if you still believe in the business. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.

See our latest analysis for CGN New Energy Holdings

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

In order to justify its P/E ratio, CGN New Energy Holdings would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered a frustrating 9.2% decrease to the company's bottom line. Even so, admirably EPS has lifted 51% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Shifting to the future, estimates from the two analysts covering the company suggest earnings should grow by 17% per year over the next three years. That's shaping up to be similar to the 16% each year growth forecast for the broader market.

In light of this, it's peculiar that CGN New Energy Holdings' P/E sits below the majority of other companies. It may be that most investors are not convinced the company can achieve future growth expectations.

The Key Takeaway

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 CGN New Energy Holdings' analyst forecasts revealed that its market-matching earnings outlook isn't contributing to its P/E as much as we would have predicted. 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 need to take note of risks, for example - CGN New Energy Holdings has 2 warning signs (and 1 which is a bit concerning) we think you should know about.

Of course, you might also be able to find a better stock than CGN New Energy Holdings. 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.