China Suntien Green Energy Corporation Limited's (HKG:956) price-to-earnings (or "P/E") ratio of 5.4x might make it look like a buy right now compared to the market in Hong Kong, where around half of the companies have P/E ratios above 9x and even P/E's above 18x 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 limited.
While the market has experienced earnings growth lately, China Suntien Green Energy's earnings have gone into reverse gear, which is not great. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If you still 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.
Does Growth Match The Low P/E?
In order to justify its P/E ratio, China Suntien Green Energy would need to produce sluggish growth that's trailing the market.
Retrospectively, the last year delivered a frustrating 10% decrease to the company's bottom line. Even so, admirably EPS has lifted 95% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.
Looking ahead now, EPS is anticipated to climb by 15% each year during the coming three years according to the nine analysts following the company. With the market predicted to deliver 16% growth per annum, the company is positioned for a comparable earnings result.
With this information, we find it odd that China Suntien Green Energy is trading at a P/E lower than the market. It may be that most investors are not convinced the company can achieve future growth expectations.
The Final Word
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 China Suntien Green Energy currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. There could be some unobserved threats to earnings preventing the P/E ratio from matching the outlook. It appears some are indeed anticipating earnings instability, because these conditions should normally provide more support to the share price.
It is also worth noting that we have found 2 warning signs for China Suntien Green Energy (1 is significant!) that you need to take into consideration.
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.
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