China Water Affairs Group Limited (HKG:855) Looks Inexpensive But Perhaps Not Attractive Enough

When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") above 13x, you may consider China Water Affairs Group Limited (HKG:855) as an attractive investment with its 9x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

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While the market has experienced earnings growth lately, China Water Affairs Group's earnings have gone into reverse gear, which is not great. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

See our latest analysis for China Water Affairs Group

If you'd like to see what analysts are forecasting going forward, you should check out our free report on China Water Affairs Group.

How Is China Water Affairs Group's Growth Trending?

China Water Affairs Group's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Retrospectively, the last year delivered a frustrating 30% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 44% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 12% each year during the coming three years according to the three analysts following the company. With the market predicted to deliver 15% growth per year, the company is positioned for a weaker earnings result.

With this information, we can see why China Water Affairs Group is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What We Can Learn From China Water Affairs Group's P/E?

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of China Water Affairs Group's analyst forecasts revealed that its inferior earnings outlook 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for China Water Affairs Group (1 is a bit concerning) you should be aware of.

If you're unsure about the strength of China Water Affairs Group's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.