Huaihe Energy (Group) Co.,Ltd's (SHSE:600575) Prospects Need A Boost To Lift Shares

With a price-to-earnings (or "P/E") ratio of 13.5x Huaihe Energy (Group) Co.,Ltd (SHSE:600575) may be sending very bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 33x and even P/E's higher than 64x 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.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Huaihe Energy (Group)Ltd has been doing quite well of late. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Huaihe Energy (Group)Ltd

Keen to find out how analysts think Huaihe Energy (Group)Ltd's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Huaihe Energy (Group)Ltd's Growth Trending?

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 296% gain to the company's bottom line. The latest three year period has also seen an excellent 143% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the only analyst covering the company suggest earnings should grow by 7.0% each year over the next three years. With the market predicted to deliver 18% growth per year, the company is positioned for a weaker earnings result.

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.

The Key Takeaway

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

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. 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 Huaihe Energy (Group)Ltd is showing 2 warning signs in our investment analysis, you should know about.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.