Everbright Securities Company Limited's (SHSE:601788) price-to-earnings (or "P/E") ratio of 20.9x might make it look like a buy right now compared to the market in China, where around half of the companies have P/E ratios above 28x and even P/E's above 54x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

While the market has experienced earnings growth lately, Everbright Securities' earnings have gone into reverse gear, which is not great. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Does Growth Match The Low P/E?

In order to justify its P/E ratio, Everbright Securities would need to produce sluggish growth that's trailing the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 6.9%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 37% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the three analysts covering the company suggest earnings growth is heading into negative territory, declining 5.1% per annum over the next three years. Meanwhile, the broader market is forecast to expand by 25% each year, which paints a poor picture.

With this information, we are not surprised that Everbright Securities is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

What We Can Learn From Everbright Securities' P/E?

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Everbright Securities maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Everbright Securities that you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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