China HGS Real Estate Inc.'s (NASDAQ:HGSH) Shares May Have Run Too Fast Too Soon

It's not a stretch to say that China HGS Real Estate Inc.'s (NASDAQ:HGSH) price-to-earnings (or "P/E") ratio of 17.2x right now seems quite "middle-of-the-road" compared to the market in the United States, where the median P/E ratio is around 16x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

As an illustration, earnings have deteriorated at China HGS Real Estate over the last year, which is not ideal at all. It might be that many expect the company to put the disappointing earnings performance behind them over the coming period, which has kept the P/E from falling. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

Check out our latest analysis for China HGS Real Estate

Where Does China HGS Real Estate's P/E Sit Within Its Industry?

It's plausible that China HGS Real Estate's fairly average P/E ratio could be a result of tendencies within its own industry. The image below shows that the Real Estate industry as a whole also has a P/E ratio similar to the market. So it appears the company's ratio could be influenced considerably by these industry numbers currently. Some industry P/E's don't move around a lot and right now most companies within the Real Estate industry should be getting restrained. Nevertheless, the company's P/E should be primarily influenced by its own financial performance.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on China HGS Real Estate will help you shine a light on its historical performance.

How Is China HGS Real Estate's Growth Trending?

China HGS Real Estate's P/E ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 28%. This means it has also seen a slide in earnings over the longer-term as EPS is down 49% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for a contraction of 13% shows the market is more attractive on an annualised basis regardless.

With this information, it's perhaps strange that China HGS Real Estate is trading at a fairly similar P/E in comparison. In general, when earnings shrink rapidly the P/E often shrinks too, which could set up shareholders for future disappointment. There's potential for the P/E to fall to lower levels if the company doesn't improve its profitability, which would be difficult to do with the current market outlook.

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.

Our examination of China HGS Real Estate revealed its sharp three-year contraction in earnings isn't impacting its P/E as much as we would have predicted, given the market is set to shrink less severely. When we see below average earnings, we suspect the share price is at risk of declining, sending the moderate P/E lower. We're also cautious about the company's ability to stay its recent medium-term course and resist even greater pain to its business from the broader market turmoil. Unless the company's relative performance improves, it's challenging to accept these prices as being reasonable.

Plus, you should also learn about these 4 warning signs we've spotted with China HGS Real Estate (including 2 which are concerning).

Of course, you might also be able to find a better stock than China HGS Real Estate. So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly.

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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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