With a price-to-earnings (or "P/E") ratio of 20.1x State Grid Yingda Co.,Ltd. (SHSE:600517) may be sending bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 30x and even P/E's higher than 54x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
State Grid YingdaLtd certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It might be that many expect the strong earnings performance to degrade substantially, 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.
How Is State Grid YingdaLtd's Growth Trending?
The only time you'd be truly comfortable seeing a P/E as low as State Grid YingdaLtd's is when the company's growth is on track to lag the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 31% last year. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.
This is in contrast to the rest of the market, which is expected to grow by 36% over the next year, materially higher than the company's recent medium-term annualised growth rates.
In light of this, it's understandable that State Grid YingdaLtd's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.
What We Can Learn From State Grid YingdaLtd's P/E?
Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
We've established that State Grid YingdaLtd maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.
Before you settle on your opinion, we've discovered 1 warning sign for State Grid YingdaLtd that you should be aware of.
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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