There wouldn't be many who think Zhuzhou CRRC Times Electric Co., Ltd.'s (HKG:3898) price-to-earnings (or "P/E") ratio of 12x is worth a mention when the median P/E in Hong Kong is similar at about 10x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.
With earnings growth that's superior to most other companies of late, Zhuzhou CRRC Times Electric has been doing relatively well. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. 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 not quite in favour.
Does Growth Match The P/E?
There's an inherent assumption that a company should be matching the market for P/E ratios like Zhuzhou CRRC Times Electric's to be considered reasonable.
Taking a look back first, we see that the company grew earnings per share by an impressive 17% last year. The latest three year period has also seen an excellent 35% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Turning to the outlook, the next year should generate growth of 13% as estimated by the analysts watching the company. With the market predicted to deliver 22% growth , the company is positioned for a weaker earnings result.
With this information, we find it interesting that Zhuzhou CRRC Times Electric is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.
The Bottom Line On Zhuzhou CRRC Times Electric's P/E
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.
Our examination of Zhuzhou CRRC Times Electric's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.
A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for Zhuzhou CRRC Times Electric 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.
