Given that nearly half of Hong Kong companies have a price-to-earnings ratio (or “P/E”) of more than 10 times, you may want to consider: China Guangguang Environmental Group Co., Ltd. (HKG:257) is a very attractive investment with a P/E ratio of 3.4x. However, it would be unwise to take the P/E ratio at face value, as there may be an explanation as to why it is so limited.
Recently, China Everbright Environmental Group has been very weak as its profits have lagged behind the market. The P/E ratio is probably low because investors think this poor performance will not improve at all. If you still believe in the business, you’d rather the company wasn’t bleeding revenue. Or at least, if you’re planning on buying up unpopular stocks, you’ll hope that the drop in earnings doesn’t get any worse.
Check out our latest analysis for China Light Environment Group.
Would you like to know how analysts think the future of China Optical Environmental Group compares to its industry? If so, we have free Reports are a great place to start.
Does growth equate to a low P/E ratio?
The only time it’s really comforting to see China Everbright Environmental Group’s P/E ratio drop as much as it is is when the company’s growth clearly lags the market.
Looking back, last year saw the company’s revenue decline by 20%. As a result, overall profits fell by 18% from three years ago. So, unfortunately, we have to admit that the company hasn’t done much to grow its revenue over that time.
Looking at the outlook, the seven analysts who follow the company estimate that the company is expected to grow at an annualized rate of 5.4% over the next three years. The market is expected to grow 16% annually, and the company’s earnings are expected to be weak.
This information helps explain why China Everbright Environment Group is trading at a lower P/E than the market. Most investors expect future growth to be limited and are only willing to pay less for the stock.
China Light Environment Group’s PER Conclusion
The power of the price-to-earnings ratio is not primarily as a valuation tool, but rather as a gauge of current investor sentiment and future expectations.
As we expected, our review of analyst forecasts for China Everbright Environment Group reveals that its poor earnings outlook is contributing to its low P/E ratio. For now, shareholders are accepting the low P/E ratio as they accept that future earnings probably won’t come as a pleasant surprise. Unless this situation improves, a barrier to stock prices will continue to form around these levels.
It is always necessary to take into account the ever-present concern of investment risks. We’ve identified 2 warning signs in collaboration with China Light Environment Group (At least one of them is a little uncomfortable), and understanding them should be part of your investment process.
If you are interested in P/E ratioyou might want to see this free A collection of other companies with high earnings growth and low P/E ratios.
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Check out our comprehensive analysis of whether China Guangguang Environmental Group is potentially overvalued or undervalued. Fair value estimates, risks and caveats, dividends, insider trading, and financial health.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodologies, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.