Huaihe Energy (Group) Co.,Ltd (SHSE:600575) Surges 30% Yet Its Low P/E Is No Reason For Excitement

Huaihe Energy (Group) Co.,Ltd (SHSE:600575) shares have continued their recent momentum with a 30% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 33% in the last year.

In spite of the firm bounce in price, Huaihe Energy (Group)Ltd may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 15x, since almost half of all companies in China have P/E ratios greater than 32x and even P/E's higher than 60x 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.

With earnings growth that's superior to most other companies of late, Huaihe Energy (Group)Ltd has been doing relatively well. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. 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 Huaihe Energy (Group)Ltd

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Huaihe Energy (Group)Ltd.

Does Growth Match The Low P/E?

In order to justify its P/E ratio, Huaihe Energy (Group)Ltd would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered an exceptional 300% gain to the company's bottom line. Pleasingly, EPS has also lifted 72% in aggregate from three years ago, thanks to the last 12 months of growth. 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 5.5% per year during the coming three years according to the one analyst following the company. Meanwhile, the rest of the market is forecast to expand by 25% per year, which is noticeably more attractive.

In light of this, it's understandable that Huaihe Energy (Group)Ltd'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.

What We Can Learn From Huaihe Energy (Group)Ltd's P/E?

Even after such a strong price move, Huaihe Energy (Group)Ltd's P/E still trails the rest of the market significantly. 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.

We've established that Huaihe Energy (Group)Ltd maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. 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.

Having said that, be aware Huaihe Energy (Group)Ltd is showing 1 warning sign in our investment analysis, you should know about.

If you're unsure about the strength of Huaihe Energy (Group)Ltd'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.