CRRC Corporation Limited's (SHSE:601766) price-to-earnings (or "P/E") ratio of 12.6x might 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 35x and even P/E's above 64x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.
Recent times have been pleasing for CRRC as its earnings have risen in spite of the market's earnings going into reverse. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
See our latest analysis for CRRC
Does Growth Match The Low P/E?
There's an inherent assumption that a company should far underperform the market for P/E ratios like CRRC's to be considered reasonable.
Taking a look back first, we see that the company grew earnings per share by an impressive 19% last year. The latest three year period has also seen a 14% overall rise in EPS, aided extensively by its short-term performance. So we can start by confirming that the company has actually done a good job of growing earnings over that time.
Looking ahead now, EPS is anticipated to climb by 14% during the coming year according to the eleven analysts following the company. With the market predicted to deliver 44% growth , the company is positioned for a weaker earnings result.
In light of this, it's understandable that CRRC's P/E sits below the majority of other companies. 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 CRRC's P/E?
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.
As we suspected, our examination of CRRC's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.
You should always think about risks. Case in point, we've spotted 2 warning signs for CRRC you should be aware of.
Of course, you might also be able to find a better stock than CRRC. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.