With a price-to-earnings (or “P/E”) ratio of 3.6x China Nuclear Energy Technology Corporation Limited (HKG:611) may be sending very bullish signals at the moment, given that almost half of all companies in Hong Kong have P/E ratios greater than 11x and even P/E’s higher than 22x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it’s justified.
China Nuclear Energy Technology has been doing a decent job lately as it’s been growing earnings at a reasonable pace. One possibility is that the P/E is low because investors think this good earnings growth might actually underperform the broader market in the near future. 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.
Check out our latest analysis for China Nuclear Energy Technology
How Is China Nuclear Energy Technology’s Growth Trending?
China Nuclear Energy Technology’s P/E ratio would be typical for a company that’s expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.
Taking a look back first, we see that the company managed to grow earnings per share by a handy 6.4% last year. The solid recent performance means it was also able to grow EPS by 14% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing earnings over that time.
Weighing that recent medium-term earnings trajectory against the broader market’s one-year forecast for expansion of 9.5% shows it’s noticeably less attractive on an annualised basis.
With this information, we can see why China Nuclear Energy Technology 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 Key Takeaway
While the price-to-earnings ratio shouldn’t be the defining factor in whether you buy a stock or not, it’s quite a capable barometer of earnings expectations.
We’ve established that China Nuclear Energy Technology maintains its low P/E on the weakness of its recentthree-year growth being lower than the wider market forecast, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won’t provide any pleasant surprises. If recent medium-term earnings trends continue, it’s hard to see the share price rising strongly in the near future under these circumstances.
Having said that, be aware China Nuclear Energy Technology is showing 4 warning signs in our investment analysis, and 2 of those can’t be ignored.
If you’re unsure about the strength of China Nuclear Energy Technology’s business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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