When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 35x, you may consider China Southern Power Grid Energy Storage Co., Ltd. (SHSE:600995) as an attractive investment with its 27.3x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

China Southern Power Grid Energy Storage has been struggling lately as its earnings have declined faster than most other companies. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. You'd much rather the company wasn't bleeding earnings if you still believe in the business. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Check out our latest analysis for China Southern Power Grid Energy Storage

Is There Any Growth For China Southern Power Grid Energy Storage?

In order to justify its P/E ratio, China Southern Power Grid Energy Storage would need to produce sluggish growth that's trailing the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 34%. This means it has also seen a slide in earnings over the longer-term as EPS is down 12% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next year should generate growth of 13% as estimated by the three analysts watching the company. With the market predicted to deliver 44% growth , the company is positioned for a weaker earnings result.

With this information, we can see why China Southern Power Grid Energy Storage is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What We Can Learn From China Southern Power Grid Energy Storage'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.

We've established that China Southern Power Grid Energy Storage maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for China Southern Power Grid Energy Storage with six simple checks will allow you to discover any risks that could be an issue.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.