When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 35x, you may consider State Grid Information & Communication Co., Ltd. (SHSE:600131) as an attractive investment with its 25.2x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

The recently shrinking earnings for State Grid Information & Communication have been in line with the market. One possibility is that the P/E is low because investors think the company's earnings may begin to slide even faster. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. In saying that, existing shareholders may feel hopeful about the share price if the company's earnings continue tracking the market.

Check out our latest analysis for State Grid Information & Communication

Is There Any Growth For State Grid Information & Communication?

The only time you'd be truly comfortable seeing a P/E as low as State Grid Information & Communication's is when the company's growth is on track to lag the market.

Retrospectively, the last year delivered a frustrating 2.3% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 51% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 22% each year as estimated by the five analysts watching the company. That's shaping up to be similar to the 22% each year growth forecast for the broader market.

With this information, we find it odd that State Grid Information & Communication 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

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 State Grid Information & Communication's analyst forecasts revealed that its market-matching earnings outlook isn't contributing to its P/E as much as we would have predicted. There could be some unobserved threats to earnings preventing the P/E ratio from matching the outlook. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

Plus, you should also learn about this 1 warning sign we've spotted with State Grid Information & Communication.

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.