With a price-to-earnings (or "P/E") ratio of 9.6x Tianjin Capital Environmental Protection Group Company Limited (SHSE:600874) may be sending very bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 29x and even P/E's higher than 53x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.
The earnings growth achieved at Tianjin Capital Environmental Protection Group over the last year would be more than acceptable for most companies. It might be that many expect the respectable 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.
SHSE:600874 Price to Earnings Ratio vs Industry June 25th 2024 Although there are no analyst estimates available for Tianjin Capital Environmental Protection Group, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.
Does Growth Match The Low P/E?
There's an inherent assumption that a company should far underperform the market for P/E ratios like Tianjin Capital Environmental Protection Group's to be considered reasonable.
Taking a look back first, we see that the company managed to grow earnings per share by a handy 14% last year. This was backed up an excellent period prior to see EPS up by 36% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.
This is in contrast to the rest of the market, which is expected to grow by 36% over the next year, materially higher than the company's recent medium-term annualised growth rates.
With this information, we can see why Tianjin Capital Environmental Protection Group is trading at a P/E lower than the market. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.
The Final Word
While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
As we suspected, our examination of Tianjin Capital Environmental Protection Group revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.
It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Tianjin Capital Environmental Protection Group (at least 1 which shouldn't be ignored), and understanding them should be part of your investment process.
If you're unsure about the strength of Tianjin Capital Environmental Protection Group's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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