When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 36x, you may consider China National Electric Apparatus Research Institute Co., Ltd. (SHSE:688128) as an attractive investment with its 21.1x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.
Recent times have been pleasing for China National Electric Apparatus Research Institute as its earnings have risen in spite of the market's earnings going into reverse. 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.
Check out our latest analysis for China National Electric Apparatus Research Institute
Is There Any Growth For China National Electric Apparatus Research Institute?
In order to justify its P/E ratio, China National Electric Apparatus Research Institute would need to produce sluggish growth that's trailing the market.
If we review the last year of earnings growth, the company posted a terrific increase of 20%. Pleasingly, EPS has also lifted 38% 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.
Shifting to the future, estimates from the lone analyst covering the company suggest earnings should grow by 23% over the next year. 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 China National Electric Apparatus Research Institute'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 Final Word
It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
As we suspected, our examination of China National Electric Apparatus Research Institute's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.
It is also worth noting that we have found 1 warning sign for China National Electric Apparatus Research Institute that you need to take into consideration.
If you're unsure about the strength of China National Electric Apparatus Research Institute'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.