When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 35x, you may consider China National Nuclear Power Co., Ltd. (SHSE:601985) as an attractive investment with its 18.5x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
With its earnings growth in positive territory compared to the declining earnings of most other companies, China National Nuclear Power has been doing quite well of late. 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 not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
How Is China National Nuclear Power's Growth Trending?
In order to justify its P/E ratio, China National Nuclear Power would need to produce sluggish growth that's trailing the market.
Taking a look back first, we see that there was hardly any earnings per share growth to speak of for the company over the past year. Still, the latest three year period was better as it's delivered a decent 26% overall rise in EPS. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.
Turning to the outlook, the next year should generate growth of 16% as estimated by the analysts watching the company. That's shaping up to be materially lower than the 38% growth forecast for the broader market.
With this information, we can see why China National Nuclear Power 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 Key Takeaway
It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
As we suspected, our examination of China National Nuclear Power's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.
Plus, you should also learn about these 2 warning signs we've spotted with China National Nuclear Power (including 1 which shouldn't be ignored).
If these risks are making you reconsider your opinion on China National Nuclear Power, 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.
