State Grid Information & Communication Co., Ltd.'s (SHSE:600131) Share Price Boosted 27% But Its Business Prospects Need A Lift Too

State Grid Information & Communication Co., Ltd. (SHSE:600131) shares have continued their recent momentum with a 27% gain in the last month alone. Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.

Even after such a large jump in price, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 33x, you may still consider State Grid Information & Communication as an attractive investment with its 28.6x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Recent times have been advantageous for State Grid Information & Communication as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. 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 State Grid Information & Communication

If you'd like to see what analysts are forecasting going forward, you should check out our free report on State Grid Information & Communication.

Is There Any Growth For State Grid Information & Communication?

There's an inherent assumption that a company should underperform the market for P/E ratios like State Grid Information & Communication's to be considered reasonable.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 4.5% last year. The latest three year period has also seen an excellent 34% overall rise in EPS, aided somewhat by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 17% per year over the next three years. With the market predicted to deliver 20% growth per year, the company is positioned for a weaker earnings result.

In light of this, it's understandable that State Grid Information & Communication's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Key Takeaway

State Grid Information & Communication's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. 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 State Grid Information & Communication maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Having said that, be aware State Grid Information & Communication is showing 1 warning sign in our investment analysis, you should know about.

Of course, you might also be able to find a better stock than State Grid Information & Communication. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.