Some Confidence Is Lacking In Huaneng Lancang River Hydropower Inc.'s (SHSE:600025) P/E

It's not a stretch to say that Huaneng Lancang River Hydropower Inc.'s (SHSE:600025) price-to-earnings (or "P/E") ratio of 26.7x right now seems quite "middle-of-the-road" compared to the market in China, where the median P/E ratio is around 28x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

With earnings growth that's superior to most other companies of late, Huaneng Lancang River Hydropower has been doing relatively well. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. 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 not quite in favour.

Check out 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.

How Is Huaneng Lancang River Hydropower's Growth Trending?

The only time you'd be comfortable seeing a P/E like Huaneng Lancang River Hydropower's is when the company's growth is tracking the market closely.

Retrospectively, the last year delivered an exceptional 16% gain to the company's bottom line. Pleasingly, EPS has also lifted 45% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 10% each year as estimated by the nine analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 24% per year, which is noticeably more attractive.

With this information, we find it interesting that Huaneng Lancang River Hydropower is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

What We Can Learn From Huaneng Lancang River Hydropower's P/E?

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Huaneng Lancang River Hydropower currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Having said that, be aware Huaneng Lancang River Hydropower is showing 2 warning signs in our investment analysis, and 1 of those is significant.

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.

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