Chongqing Three Gorges Water Conservancy and Electric Power Co., Ltd.'s (SHSE:600116) price-to-earnings (or "P/E") ratio of 39x might make it look like a sell right now compared to the market in China, where around half of the companies have P/E ratios below 34x and even P/E's below 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 as high as it is.

Recent times haven't been advantageous for Chongqing Three Gorges Water Conservancy and Electric Power as its earnings have been falling quicker than most other companies. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

View our latest analysis for Chongqing Three Gorges Water Conservancy and Electric Power

Does Growth Match The High P/E?

In order to justify its P/E ratio, Chongqing Three Gorges Water Conservancy and Electric Power would need to produce impressive growth in excess of the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 24%. As a result, earnings from three years ago have also fallen 39% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 130% over the next year. That's shaping up to be materially higher than the 44% growth forecast for the broader market.

With this information, we can see why Chongqing Three Gorges Water Conservancy and Electric Power is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From Chongqing Three Gorges Water Conservancy and Electric Power's P/E?

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Chongqing Three Gorges Water Conservancy and Electric Power maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

You need to take note of risks, for example - Chongqing Three Gorges Water Conservancy and Electric Power has 3 warning signs (and 1 which is a bit concerning) we think you should know about.

You might be able to find a better investment than Chongqing Three Gorges Water Conservancy and Electric Power. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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