Tianjin Capital Environmental Protection Group Company Limited's (SHSE:600874) Low P/E No Reason For Excitement

Tianjin Capital Environmental Protection Group Company Limited's (SHSE:600874) price-to-earnings (or "P/E") ratio of 11.2x might make it look like a strong buy right now compared to the market in China, where around half of the companies have P/E ratios above 31x and even P/E's above 57x 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 so limited.

For example, consider that Tianjin Capital Environmental Protection Group's financial performance has been poor lately as its earnings have been in decline. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming 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.

View our latest analysis for Tianjin Capital Environmental Protection Group

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Is There Any Growth For Tianjin Capital Environmental Protection Group?

The only time you'd be truly comfortable seeing a P/E as depressed as Tianjin Capital Environmental Protection Group's is when the company's growth is on track to lag the market decidedly.

Retrospectively, the last year delivered a frustrating 10% decrease to the company's bottom line. Regardless, EPS has managed to lift by a handy 24% in aggregate from three years ago, thanks to the earlier period of growth. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.

This is in contrast to the rest of the market, which is expected to grow by 41% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why Tianjin Capital Environmental Protection Group 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 Tianjin Capital Environmental Protection Group's P/E

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.

As we suspected, our examination of Tianjin Capital Environmental Protection Group revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

There are also other vital risk factors to consider and we've discovered 2 warning signs for Tianjin Capital Environmental Protection Group (1 can't be ignored!) that you should be aware of before investing here.

If you're unsure about the strength of Tianjin Capital Environmental Protection Group'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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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.