Take Care Before Diving Into The Deep End On China Life Insurance Co., Ltd. (TPE:2823)

When close to half the companies in Taiwan have price-to-earnings ratios (or “P/E’s”) above 19x, you may consider China Life Insurance Co., Ltd. (TPE:2823) as a highly attractive investment with its 5.8x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it’s justified.

China Life Insurance certainly has been doing a great job lately as it’s been growing earnings at a really rapid pace. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If that doesn’t eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for China Life Insurance

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TSEC:2823 Price Based on Past Earnings August 23rd 2020
Although there are no analyst estimates available for China Life Insurance, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Any Growth For China Life Insurance?

In order to justify its P/E ratio, China Life Insurance would need to produce anemic growth that’s substantially trailing the market.

Retrospectively, the last year delivered an exceptional 50% gain to the company’s bottom line. The strong recent performance means it was also able to grow EPS by 138% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

This is in contrast to the rest of the market, which is expected to grow by 18% over the next year, materially lower than the company’s recent medium-term annualised growth rates.

With this information, we find it odd that China Life Insurance is trading at a P/E lower than the market. It looks like most investors are not convinced the company can maintain its recent growth rates.

The Final Word

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.

Our examination of China Life Insurance revealed its three-year earnings trends aren’t contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

Before you settle on your opinion, we’ve discovered 1 warning sign for China Life Insurance that you should be aware of.

If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/E’s below 20x.

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This article by Simply Wall St is general in nature. 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.
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