China Suntien Green Energy Corporation Limited's (HKG:956) price-to-earnings (or "P/E") ratio of 6.5x might make it look like a buy right now compared to the market in Hong Kong, where around half of the companies have P/E ratios above 10x and even P/E's above 20x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.
With earnings growth that's superior to most other companies of late, China Suntien Green Energy has been doing relatively well. 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.
See our latest analysis for China Suntien Green Energy
Does Growth Match The Low P/E?
In order to justify its P/E ratio, China Suntien Green Energy would need to produce sluggish growth that's trailing the market.
Retrospectively, the last year delivered a decent 4.6% gain to the company's bottom line. Ultimately though, it couldn't turn around the poor performance of the prior period, with EPS shrinking 11% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
Looking ahead now, EPS is anticipated to climb by 13% per annum during the coming three years according to the seven analysts following the company. Meanwhile, the rest of the market is forecast to expand by 13% each year, which is not materially different.
With this information, we find it odd that China Suntien Green Energy is trading at a P/E lower than the market. It may be that most investors are not convinced the company can achieve future growth expectations.
The Key Takeaway
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 China Suntien Green Energy currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. There could be some unobserved threats to earnings preventing the P/E ratio from matching the outlook. It appears some are indeed anticipating earnings instability, because these conditions should normally provide more support to the share price.
Having said that, be aware China Suntien Green Energy is showing 2 warning signs in our investment analysis, and 1 of those shouldn't be ignored.
Of course, you might also be able to find a better stock than China Suntien Green Energy. 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.