When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 9x, you may consider China Power International Development Limited (HKG:2380) as a stock to potentially avoid with its 14.1x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

China Power International Development could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

How Is China Power International Development's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as high as China Power International Development's is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered a frustrating 3.4% decrease to the company's bottom line. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 25% in total. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 41% per year over the next three years. With the market only predicted to deliver 16% per year, the company is positioned for a stronger earnings result.

With this information, we can see why China Power International Development is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From China Power International Development'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.

We've established that China Power International Development maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 2 warning signs for China Power International Development (of which 1 is a bit concerning!) you should know about.

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

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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.