Improved Earnings Required Before Huaneng Lancang River Hydropower Inc. (SHSE:600025) Shares Find Their Feet

When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 30x, you may consider Huaneng Lancang River Hydropower Inc. (SHSE:600025) as an attractive investment with its 24.4x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

While the market has experienced earnings growth lately, Huaneng Lancang River Hydropower's earnings have gone into reverse gear, which is not great. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

See our latest analysis for Huaneng Lancang River Hydropower

Keen to find out how analysts think Huaneng Lancang River Hydropower's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Any Growth For Huaneng Lancang River Hydropower?

There's an inherent assumption that a company should underperform the market for P/E ratios like Huaneng Lancang River Hydropower's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 3.4%. Still, the latest three year period has seen an excellent 42% overall rise in EPS, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Turning to the outlook, the next year should generate growth of 25% as estimated by the nine analysts watching the company. That's shaping up to be materially lower than the 34% growth forecast for the broader market.

In light of this, it's understandable that Huaneng Lancang River Hydropower'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 Final Word

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 Huaneng Lancang River Hydropower's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

You need to take note of risks, for example - Huaneng Lancang River Hydropower has 2 warning signs (and 1 which is concerning) we think you should know about.

If these risks are making you reconsider your opinion on Huaneng Lancang River Hydropower, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.