Anhui Honglu Steel Construction(Group) CO., LTD's (SZSE:002541) price-to-earnings (or "P/E") ratio of 12.6x might make it look like a strong buy right now compared to the market in China, where around half of the companies have P/E ratios above 35x and even P/E's above 65x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.
There hasn't been much to differentiate Anhui Honglu Steel Construction(Group)'s and the market's retreating earnings lately. One possibility is that the P/E is low because investors think the company's earnings may begin to slide even faster. You'd much rather the company wasn't bleeding earnings if you still believe in the business. In saying that, existing shareholders may feel hopeful about the share price if the company's earnings continue tracking the market.
See our latest analysis for Anhui Honglu Steel Construction(Group)
Is There Any Growth For Anhui Honglu Steel Construction(Group)?
There's an inherent assumption that a company should far underperform the market for P/E ratios like Anhui Honglu Steel Construction(Group)'s to be considered reasonable.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 1.8%. Even so, admirably EPS has lifted 60% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.
Shifting to the future, estimates from the twelve analysts covering the company suggest earnings should grow by 29% over the next year. That's shaping up to be materially lower than the 44% growth forecast for the broader market.
With this information, we can see why Anhui Honglu Steel Construction(Group) is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.
What We Can Learn From Anhui Honglu Steel Construction(Group)'s P/E?
Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
We've established that Anhui Honglu Steel Construction(Group) maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.
Don't forget that there may be other risks. For instance, we've identified 6 warning signs for Anhui Honglu Steel Construction(Group) (2 are a bit concerning) you should be aware of.
Of course, you might also be able to find a better stock than Anhui Honglu Steel Construction(Group). So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.