With a price-to-earnings (or "P/E") ratio of 7x Power Construction Corporation of China, Ltd (SHSE:601669) may be sending very bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 32x and even P/E's higher than 58x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.
There hasn't been much to differentiate Power Construction Corporation of China's and the market's earnings growth lately. One possibility is that the P/E is low because investors think this modest earnings performance may begin to slide. If not, then existing shareholders have reason to be optimistic about the future direction of the share price.
Does Growth Match The Low P/E?
In order to justify its P/E ratio, Power Construction Corporation of China would need to produce anemic growth that's substantially trailing the market.
Retrospectively, the last year delivered virtually the same number to the company's bottom line as the year before. However, a few strong years before that means that it was still able to grow EPS by an impressive 55% in total over the last three years. 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 30% during the coming year according to the eight analysts following the company. That's shaping up to be materially lower than the 36% growth forecast for the broader market.
In light of this, it's understandable that Power Construction Corporation of China'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 Power Construction Corporation of China'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 Power Construction Corporation of China 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. It's hard to see the share price rising strongly in the near future under these circumstances.
Before you take the next step, you should know about the 2 warning signs for Power Construction Corporation of China (1 doesn't sit too well with us!) that we have uncovered.
If you're unsure about the strength of Power Construction Corporation of China's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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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.