TCL Zhonghuan Renewable Energy Technology Co.,Ltd.'s (SZSE:002129) price-to-earnings (or "P/E") ratio of 7.5x 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 63x 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.
TCL Zhonghuan Renewable Energy TechnologyLtd certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. 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 not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
See our latest analysis for TCL Zhonghuan Renewable Energy TechnologyLtd
How Is TCL Zhonghuan Renewable Energy TechnologyLtd's Growth Trending?
In order to justify its P/E ratio, TCL Zhonghuan Renewable Energy TechnologyLtd would need to produce anemic growth that's substantially trailing the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 28% last year. Pleasingly, EPS has also lifted 573% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.
Looking ahead now, EPS is anticipated to climb by 14% each year during the coming three years according to the analysts following the company. With the market predicted to deliver 22% growth per year, the company is positioned for a weaker earnings result.
In light of this, it's understandable that TCL Zhonghuan Renewable Energy TechnologyLtd'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.
The Bottom Line On TCL Zhonghuan Renewable Energy TechnologyLtd'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 TCL Zhonghuan Renewable Energy TechnologyLtd maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. 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 TCL Zhonghuan Renewable Energy TechnologyLtd.
Of course, you might also be able to find a better stock than TCL Zhonghuan Renewable Energy TechnologyLtd. 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.