When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 33x, you may consider China West Construction Group Co., Ltd (SZSE:002302) as a highly attractive investment with its 13.4x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.
Earnings have risen firmly for China West Construction Group recently, which is pleasing to see. It might be that many expect the respectable earnings performance to degrade substantially, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.
Does Growth Match The Low P/E?
In order to justify its P/E ratio, China West Construction Group would need to produce anemic growth that's substantially trailing the market.
If we review the last year of earnings growth, the company posted a terrific increase of 30%. Still, incredibly EPS has fallen 40% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
Comparing that to the market, which is predicted to deliver 38% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.
In light of this, it's understandable that China West Construction Group's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as recent earnings trends are already weighing down the shares.
The Final Word
We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
As we suspected, our examination of China West Construction Group revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.
Having said that, be aware China West Construction Group is showing 1 warning sign in our investment analysis, you should know about.
If you're unsure about the strength of China West Construction 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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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.