Sichuan New Energy Power Company Limited's (SZSE:000155) price-to-earnings (or "P/E") ratio of 24x might make it look like a 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 low for a reason and it requires further investigation to determine if it's justified.
With its earnings growth in positive territory compared to the declining earnings of most other companies, Sichuan New Energy Power has been doing quite well of late. 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 you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.
See our latest analysis for Sichuan New Energy Power
Is There Any Growth For Sichuan New Energy Power?
The only time you'd be truly comfortable seeing a P/E as low as Sichuan New Energy Power's is when the company's growth is on track to lag the market.
Retrospectively, the last year delivered an exceptional 96% gain to the company's bottom line. Pleasingly, EPS has also lifted 303% 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.
Turning to the outlook, the next year should generate growth of 33% as estimated by the only analyst watching the company. That's shaping up to be materially lower than the 43% growth forecast for the broader market.
In light of this, it's understandable that Sichuan New Energy Power'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.
The Bottom Line On Sichuan New Energy Power's P/E
While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
We've established that Sichuan New Energy Power 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.
And what about other risks? Every company has them, and we've spotted 2 warning signs for Sichuan New Energy Power you should know about.
If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
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