Getting In Cheap On Sichuan Mingxing Electric Power Co., Ltd. (SHSE:600101) Is Unlikely

It's not a stretch to say that Sichuan Mingxing Electric Power Co., Ltd.'s (SHSE:600101) price-to-earnings (or "P/E") ratio of 26.9x right now seems quite "middle-of-the-road" compared to the market in China, where the median P/E ratio is around 29x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

As an illustration, earnings have deteriorated at Sichuan Mingxing Electric Power over the last year, which is not ideal at all. One possibility is that the P/E is moderate because investors think the company might still do enough to be in line with the broader market in the near future. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

See our latest analysis for Sichuan Mingxing Electric Power

Although there are no analyst estimates available for Sichuan Mingxing Electric Power, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Does Growth Match The P/E?

Sichuan Mingxing Electric Power's P/E ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 11%. Still, the latest three year period has seen an excellent 85% 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.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 36% shows it's noticeably less attractive on an annualised basis.

With this information, we find it interesting that Sichuan Mingxing Electric Power is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. They may be setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Bottom Line On Sichuan Mingxing Electric Power's P/E

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.

Our examination of Sichuan Mingxing Electric Power revealed its three-year earnings trends aren't impacting its P/E as much as we would have predicted, given they look worse than current market expectations. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

You always need to take note of risks, for example - Sichuan Mingxing Electric Power has 2 warning signs we think you should be aware of.

You might be able to find a better investment than Sichuan Mingxing Electric Power. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.