When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") above 10x, you may consider Metallurgical Corporation of China Ltd. (HKG:1618) as an attractive investment with its 5.6x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.
Metallurgical Corporation of China hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If you still 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?
There's an inherent assumption that a company should underperform the market for P/E ratios like Metallurgical Corporation of China's to be considered reasonable.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 48%. The last three years don't look nice either as the company has shrunk EPS by 34% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Shifting to the future, estimates from the nine analysts covering the company suggest earnings should grow by 43% over the next year. Meanwhile, the rest of the market is forecast to only expand by 22%, which is noticeably less attractive.
With this information, we find it odd that Metallurgical Corporation of China is trading at a P/E lower than the market. It looks like most investors are not convinced at all that the company can achieve future growth expectations.
The Bottom Line On Metallurgical Corporation of China's P/E
Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
Our examination of Metallurgical Corporation of China's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.
It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Metallurgical Corporation of China, and understanding them should be part of your investment process.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.
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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.
