China Water Affairs Group Limited (HKG:855) shares have had a really impressive month, gaining 35% after a shaky period beforehand. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 23% in the last twelve months.

In spite of the firm bounce in price, China Water Affairs Group may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 5.1x, since almost half of all companies in Hong Kong have P/E ratios greater than 9x and even P/E's higher than 19x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

With earnings that are retreating more than the market's of late, China Water Affairs Group has been very sluggish. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.

Is There Any Growth For China Water Affairs Group?

In order to justify its P/E ratio, China Water Affairs Group 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 7.2%. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 6.0% in total. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.

Shifting to the future, estimates from the two analysts covering the company suggest earnings should grow by 9.3% per year over the next three years. That's shaping up to be materially lower than the 16% per year growth forecast for the broader market.

In light of this, it's understandable that China Water Affairs Group's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Bottom Line On China Water Affairs Group's P/E

China Water Affairs Group's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. 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.

We've established that China Water Affairs Group maintains its low P/E on the weakness of its forecast growth being lower than the wider market, 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.

Before you settle on your opinion, we've discovered 2 warning signs for China Water Affairs Group (1 is a bit concerning!) that 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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