China Three Gorges Renewables (Group) Co.,Ltd.'s (SHSE:600905) price-to-earnings (or "P/E") ratio of 17.2x 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 27x and even P/E's above 48x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.
With its earnings growth in positive territory compared to the declining earnings of most other companies, China Three Gorges Renewables (Group)Ltd 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 not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
What Are Growth Metrics Telling Us About The Low P/E?
There's an inherent assumption that a company should underperform the market for P/E ratios like China Three Gorges Renewables (Group)Ltd's to be considered reasonable.
Retrospectively, the last year delivered a decent 2.6% gain to the company's bottom line. This was backed up an excellent period prior to see EPS up by 42% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Turning to the outlook, the next three years should generate growth of 22% per year as estimated by the twelve analysts watching the company. That's shaping up to be similar to the 22% each year growth forecast for the broader market.
With this information, we find it odd that China Three Gorges Renewables (Group)Ltd is trading at a P/E lower than the market. It may be that most investors are not convinced the company can achieve future growth expectations.
The Bottom Line On China Three Gorges Renewables (Group)Ltd'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.
Our examination of China Three Gorges Renewables (Group)Ltd's analyst forecasts revealed that its market-matching earnings outlook isn't contributing to its P/E as much as we would have predicted. There could be some unobserved threats to earnings preventing the P/E ratio from matching the outlook. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.
There are also other vital risk factors to consider and we've discovered 2 warning signs for China Three Gorges Renewables (Group)Ltd (1 shouldn't be ignored!) that you should be aware of before investing here.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.
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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.