Chengdu Tangyuan Electric Co.,Ltd. (SZSE:300789) shares have had a horrible month, losing 26% after a relatively good period beforehand. Longer-term shareholders would now have taken a real hit with the stock declining 8.0% in the last year.
In spite of the heavy fall in price, Chengdu Tangyuan ElectricLtd's price-to-earnings (or "P/E") ratio of 16.2x might still make it look like a buy right now compared to the market in China, where around half of the companies have P/E ratios above 30x and even P/E's above 54x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.
With earnings growth that's exceedingly strong of late, Chengdu Tangyuan ElectricLtd has been doing very well. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
View our latest analysis for Chengdu Tangyuan ElectricLtd
What Are Growth Metrics Telling Us About The Low P/E?
Chengdu Tangyuan ElectricLtd's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 102% last year. The latest three year period has also seen an excellent 62% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 42% shows it's noticeably less attractive on an annualised basis.
With this information, we can see why Chengdu Tangyuan ElectricLtd 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 Bottom Line On Chengdu Tangyuan ElectricLtd's P/E
The softening of Chengdu Tangyuan ElectricLtd's shares means its P/E is now sitting at a pretty low level. 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.
We've established that Chengdu Tangyuan ElectricLtd maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.
Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Chengdu Tangyuan ElectricLtd (1 is significant) you should be aware of.
If these risks are making you reconsider your opinion on Chengdu Tangyuan ElectricLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.
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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.