Central Plains Environment Protection Co.,Ltd.'s (SZSE:000544) Share Price Boosted 25% But Its Business Prospects Need A Lift Too

The Central Plains Environment Protection Co.,Ltd. (SZSE:000544) share price has done very well over the last month, posting an excellent gain of 25%. Taking a wider view, although not as strong as the last month, the full year gain of 22% is also fairly reasonable.

Even after such a large jump in price, Central Plains Environment ProtectionLtd may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 8.5x, since almost half of all companies in China have P/E ratios greater than 33x and even P/E's higher than 61x are not unusual. 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.

Central Plains Environment ProtectionLtd certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for Central Plains Environment ProtectionLtd

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Does Growth Match The Low P/E?

In order to justify its P/E ratio, Central Plains Environment ProtectionLtd would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered an exceptional 15% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 94% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 17% during the coming year according to the sole analyst following the company. With the market predicted to deliver 38% growth , the company is positioned for a weaker earnings result.

In light of this, it's understandable that Central Plains Environment ProtectionLtd's P/E sits below the majority of other companies. 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

Shares in Central Plains Environment ProtectionLtd are going to need a lot more upward momentum to get the company's P/E out of its slump. 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.

As we suspected, our examination of Central Plains Environment ProtectionLtd's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. 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 Central Plains Environment ProtectionLtd (including 1 which makes us a bit uncomfortable).

If you're unsure about the strength of Central Plains Environment ProtectionLtd'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.