It's not a stretch to say that Dongfang Electric Corporation Limited's (HKG:1072) price-to-earnings (or "P/E") ratio of 11.4x right now seems quite "middle-of-the-road" compared to the market in Hong Kong, where the median P/E ratio is around 11x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.
Our free stock report includes 2 warning signs investors should be aware of before investing in Dongfang Electric. Read for free now.Dongfang Electric 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 strengthen positively, which has kept the P/E from falling. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.
Check out our latest analysis for Dongfang Electric
How Is Dongfang Electric's Growth Trending?
There's an inherent assumption that a company should be matching the market for P/E ratios like Dongfang Electric's to be considered reasonable.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 18%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 18% 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.
Looking ahead now, EPS is anticipated to climb by 16% per annum during the coming three years according to the six analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 14% per annum, which is noticeably less attractive.
With this information, we find it interesting that Dongfang Electric is trading at a fairly similar P/E to the market. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.
What We Can Learn From Dongfang Electric's P/E?
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.
Our examination of Dongfang Electric's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E as much as we would have predicted. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.
And what about other risks? Every company has them, and we've spotted 2 warning signs for Dongfang Electric you should know about.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.
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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.