When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") above 10x, you may consider China Merchants Port Holdings Company Limited (HKG:144) as an attractive investment with its 7x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's superior to most other companies of late, China Merchants Port Holdings has been doing relatively well. 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.

Is There Any Growth For China Merchants Port Holdings?

In order to justify its P/E ratio, China Merchants Port Holdings would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered a decent 11% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen an unpleasant 24% overall drop in EPS. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next three years should generate growth of 1.6% per annum as estimated by the nine analysts watching the company. That's shaping up to be materially lower than the 12% per annum growth forecast for the broader market.

With this information, we can see why China Merchants Port Holdings is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Final Word

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 Merchants Port Holdings 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.

Before you settle on your opinion, we've discovered 1 warning sign for China Merchants Port Holdings that you should be aware of.

Of course, you might also be able to find a better stock than China Merchants Port Holdings. 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.