Unpleasant Surprises Could Be In Store For China HGS Real Estate Inc.'s (NASDAQ:HGSH) Shares

Simply Wall St
·4 min read

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There wouldn't be many who think China HGS Real Estate Inc.'s (NASDAQ:HGSH) price-to-earnings (or "P/E") ratio of 16.8x is worth a mention when the median P/E in the United States is similar at about 16x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

For instance, China HGS Real Estate's receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is moderate because investors think the company might still do enough to be in line with the broader market in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

Check out our latest analysis for China HGS Real Estate

Where Does China HGS Real Estate's P/E Sit Within Its Industry?

We'd like to see if P/E's within China HGS Real Estate's industry might provide some colour around the company's fairly average P/E ratio. The image below shows that the Real Estate industry as a whole also has a P/E ratio similar to the market. So we'd say there is merit in the premise that the company's ratio being shaped by its industry at this time. Some industry P/E's don't move around a lot and right now most companies within the Real Estate industry should be getting restrained. Whilst this can be a heavy component, industry factors are normally secondary to company financials and earnings.

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Want the full picture on earnings, revenue and cash flow for the company? Then our free report on China HGS Real Estate will help you shine a light on its historical performance.

Is There Some Growth For China HGS Real Estate?

China HGS Real Estate's P/E ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 28%. This means it has also seen a slide in earnings over the longer-term as EPS is down 49% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for a contraction of 11% shows the market is more attractive on an annualised basis regardless.

With this information, it's perhaps strange that China HGS Real Estate is trading at a fairly similar P/E in comparison. With earnings going quickly in reverse, it's not guaranteed that the P/E has found a floor yet. There's potential for the P/E to fall to lower levels if the company doesn't improve its profitability, which would be difficult to do with the current market outlook.

The Key Takeaway

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 HGS Real Estate currently trades on a higher than expected P/E since its recent three-year earnings are even worse than the forecasts for a struggling market. When we see below average earnings, we suspect the share price is at risk of declining, sending the moderate P/E lower. In addition, we would be concerned whether the company can even maintain its medium-term level of performance under these tough market conditions. Unless the company's relative performance improves, it's challenging to accept these prices as being reasonable.

Plus, you should also learn about these 4 warning signs we've spotted with China HGS Real Estate (including 2 which don't sit too well with us).

If these risks are making you reconsider your opinion on China HGS Real Estate, explore our interactive list of high quality stocks to get an idea of what else is out there.

This article by Simply Wall St is general in nature. 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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