When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 30x, you may consider EIT Environmental Development Group Co.,Ltd (SZSE:300815) as a highly attractive investment with its 9x 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 so limited.
EIT Environmental Development GroupLtd certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, 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.
View our latest analysis for EIT Environmental Development GroupLtd
How Is EIT Environmental Development GroupLtd's Growth Trending?
In order to justify its P/E ratio, EIT Environmental Development GroupLtd would need to produce anemic growth that's substantially trailing the market.
If we review the last year of earnings growth, the company posted a terrific increase of 33%. Still, incredibly EPS has fallen 13% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
Turning to the outlook, the next year should generate growth of 15% as estimated by the three analysts watching the company. That's shaping up to be materially lower than the 42% growth forecast for the broader market.
With this information, we can see why EIT Environmental Development GroupLtd is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.
The Final Word
Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
We've established that EIT Environmental Development GroupLtd maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
Plus, you should also learn about these 2 warning signs we've spotted with EIT Environmental Development GroupLtd (including 1 which is concerning).
Of course, you might also be able to find a better stock than EIT Environmental Development GroupLtd. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
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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.