With a median price-to-earnings (or "P/E") ratio of close to 10x in Hong Kong, you could be forgiven for feeling indifferent about China Resources Power Holdings Company Limited's (HKG:836) P/E ratio of 9.5x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.
China Resources Power Holdings certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.
Does Growth Match The P/E?
The only time you'd be comfortable seeing a P/E like China Resources Power Holdings' is when the company's growth is tracking the market closely.
Taking a look back first, we see that the company grew earnings per share by an impressive 56% last year. Pleasingly, EPS has also lifted 45% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Looking ahead now, EPS is anticipated to climb by 20% per year during the coming three years according to the analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 16% per year, which is noticeably less attractive.
With this information, we find it interesting that China Resources Power Holdings is trading at a fairly similar P/E to the market. It may be that most investors aren't convinced the company can achieve future growth expectations.
The Key Takeaway
We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
We've established that China Resources Power Holdings currently trades on a lower than expected P/E since its forecast growth is higher than the wider market. There could be some unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. It appears some are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.
You need to take note of risks, for example - China Resources Power Holdings has 2 warning signs (and 1 which is a bit concerning) we think you should know about.
Of course, you might also be able to find a better stock than China Resources Power Holdings. 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.