When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 35x, you may consider Huaneng Lancang River Hydropower Inc. (SHSE:600025) as an attractive investment with its 22x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
Huaneng Lancang River Hydropower's negative earnings growth of late has neither been better nor worse than most other companies. It might be that many expect the company's earnings performance to degrade further, which has repressed the P/E. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. In saying that, existing shareholders may feel hopeful about the share price if the company's earnings continue tracking the market.
Check out our latest analysis for Huaneng Lancang River Hydropower
How Is Huaneng Lancang River Hydropower's Growth Trending?
In order to justify its P/E ratio, Huaneng Lancang River Hydropower would need to produce sluggish growth that's trailing the market.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 3.4%. Still, the latest three year period has seen an excellent 42% overall rise in EPS, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.
Looking ahead now, EPS is anticipated to climb by 25% during the coming year according to the nine analysts following the company. That's shaping up to be materially lower than the 44% growth forecast for the broader market.
In light of this, it's understandable that Huaneng Lancang River Hydropower's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.
What We Can Learn From Huaneng Lancang River Hydropower'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.
We've established that Huaneng Lancang River Hydropower 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
Plus, you should also learn about these 2 warning signs we've spotted with Huaneng Lancang River Hydropower (including 1 which is concerning).
Of course, you might also be able to find a better stock than Huaneng Lancang River Hydropower. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
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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.