China State Construction Engineering Corporation Limited (SHSE:601668) Shares Fly 33% But Investors Aren't Buying For Growth

Simply Wall St · 10/14 22:08

China State Construction Engineering Corporation Limited (SHSE:601668) shareholders would be excited to see that the share price has had a great month, posting a 33% gain and recovering from prior weakness. Taking a wider view, although not as strong as the last month, the full year gain of 21% is also fairly reasonable.

Even after such a large jump in price, China State Construction Engineering's price-to-earnings (or "P/E") ratio of 4.9x might still make it look like a strong buy right now compared to the market in China, where around half of the companies have P/E ratios above 32x and even P/E's above 61x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

Recent times have been pleasing for China State Construction Engineering as its earnings have risen in spite of the market's earnings going into reverse. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. 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.

View our latest analysis for China State Construction Engineering

pe-multiple-vs-industry
SHSE:601668 Price to Earnings Ratio vs Industry October 14th 2024
Keen to find out how analysts think China State Construction Engineering's future stacks up against the industry? In that case, our free report is a great place to start.

What Are Growth Metrics Telling Us About The Low P/E?

China State Construction Engineering's P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

Retrospectively, the last year delivered a decent 5.5% gain to the company's bottom line. EPS has also lifted 7.2% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 6.5% per annum over the next three years. With the market predicted to deliver 19% growth each year, the company is positioned for a weaker earnings result.

With this information, we can see why China State Construction Engineering 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.

What We Can Learn From China State Construction Engineering's P/E?

Even after such a strong price move, China State Construction Engineering's P/E still trails the rest of the market significantly. 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.

We've established that China State Construction Engineering 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.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for China State Construction Engineering (1 is concerning) you should be aware of.

Of course, you might also be able to find a better stock than China State Construction Engineering. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.