Market Participants Recognise Chongqing Three Gorges Water Conservancy and Electric Power Co., Ltd.'s (SHSE:600116) Earnings

With a price-to-earnings (or "P/E") ratio of 37.5x Chongqing Three Gorges Water Conservancy and Electric Power Co., Ltd. (SHSE:600116) may be sending bearish signals at the moment, given that almost half of all companies in China have P/E ratios under 31x and even P/E's lower than 19x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Chongqing Three Gorges Water Conservancy and Electric Power hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

View our latest analysis for Chongqing Three Gorges Water Conservancy and Electric Power

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Is There Enough Growth For Chongqing Three Gorges Water Conservancy and Electric Power?

The only time you'd be truly comfortable seeing a P/E as high as Chongqing Three Gorges Water Conservancy and Electric Power's is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered a frustrating 24% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 39% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 130% over the next year. With the market only predicted to deliver 39%, the company is positioned for a stronger earnings result.

With this information, we can see why Chongqing Three Gorges Water Conservancy and Electric Power is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From Chongqing Three Gorges Water Conservancy and Electric Power'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.

As we suspected, our examination of Chongqing Three Gorges Water Conservancy and Electric Power's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

It is also worth noting that we have found 3 warning signs for Chongqing Three Gorges Water Conservancy and Electric Power (1 is concerning!) that you need to take into consideration.

Of course, you might also be able to find a better stock than Chongqing Three Gorges Water Conservancy and Electric Power. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.