China Power International Development Limited's (HKG:2380) price-to-earnings (or "P/E") ratio of 15.7x might make it look like a strong sell right now compared to the market in Hong Kong, where around half of the companies have P/E ratios below 9x and even P/E's below 5x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.
China Power International Development could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
View our latest analysis for China Power International Development
Is There Enough Growth For China Power International Development?
In order to justify its P/E ratio, China Power International Development would need to produce outstanding growth well in excess of the market.
Retrospectively, the last year delivered a frustrating 3.4% decrease to the company's bottom line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 25% overall rise in EPS. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.
Turning to the outlook, the next three years should generate growth of 41% per year as estimated by the analysts watching the company. That's shaping up to be materially higher than the 15% per year growth forecast for the broader market.
In light of this, it's understandable that China Power International Development's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
What We Can Learn From China Power International Development's P/E?
Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
We've established that China Power International Development maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.
Before you take the next step, you should know about the 2 warning signs for China Power International Development (1 makes us a bit uncomfortable!) that we have uncovered.
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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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.
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