When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 29x, you may consider Cofco Sugar Holding CO.,LTD. (SHSE:600737) as a highly attractive investment with its 9.2x 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.
Cofco Sugar HoldingLTD certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong 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, Cofco Sugar HoldingLTD would need to produce anemic growth that's substantially trailing the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 182% last year. The latest three year period has also seen an excellent 275% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Looking ahead now, EPS is anticipated to climb by 0.4% per annum during the coming three years according to the three analysts following the company. Meanwhile, the rest of the market is forecast to expand by 25% per year, which is noticeably more attractive.
In light of this, it's understandable that Cofco Sugar HoldingLTD'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 Cofco Sugar HoldingLTD's P/E
While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
We've established that Cofco Sugar HoldingLTD 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. 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 Cofco Sugar HoldingLTD (1 is significant!) that you should be aware of.
You might be able to find a better investment than Cofco Sugar HoldingLTD. 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.
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