With a price-to-earnings (or "P/E") ratio of 4.7x CGN New Energy Holdings Co., Ltd. (HKG:1811) may be sending bullish signals at the moment, given that almost half of all companies in Hong Kong have P/E ratios greater than 9x and even P/E's higher than 18x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.
CGN New Energy Holdings has been struggling lately as its earnings have declined faster than most other companies. 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.
See our latest analysis for CGN New Energy Holdings
How Is CGN New Energy Holdings' Growth Trending?
In order to justify its P/E ratio, CGN New Energy Holdings 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 9.2%. Even so, admirably EPS has lifted 51% in aggregate from three years ago, notwithstanding the last 12 months. 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 two analysts covering the company suggest earnings should grow by 17% per annum over the next three years. Meanwhile, the rest of the market is forecast to expand by 15% each year, which is not materially different.
With this information, we find it odd that CGN New Energy Holdings is trading at a P/E lower than the market. It may be that most investors are not convinced the company can achieve future growth expectations.
What We Can Learn From CGN New Energy Holdings' P/E?
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.
We've established that CGN New Energy Holdings currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. There could be some unobserved threats to earnings preventing the P/E ratio from matching the outlook. It appears some are indeed anticipating earnings instability, because these conditions should normally provide more support to the share price.
It is also worth noting that we have found 2 warning signs for CGN New Energy Holdings (1 is a bit concerning!) that you need to take into consideration.
You might be able to find a better investment than CGN New Energy Holdings. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).
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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.
