Lacklustre Performance Is Driving Inner Mongolia MengDian HuaNeng Thermal Power Corporation Limited's (SHSE:600863) Low P/E

Inner Mongolia MengDian HuaNeng Thermal Power Corporation Limited's (SHSE:600863) price-to-earnings (or "P/E") ratio of 15.5x might make it look like a strong buy right now compared to the market in China, where around half of the companies have P/E ratios above 33x and even P/E's above 62x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

Inner Mongolia MengDian HuaNeng Thermal Power hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. 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.

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Is There Any Growth For Inner Mongolia MengDian HuaNeng Thermal Power?

In order to justify its P/E ratio, Inner Mongolia MengDian HuaNeng Thermal Power would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered a frustrating 3.6% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 156% in total over the last three years. 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 three years should generate growth of 16% per year as estimated by the six analysts watching the company. With the market predicted to deliver 26% growth each year, the company is positioned for a weaker earnings result.

In light of this, it's understandable that Inner Mongolia MengDian HuaNeng Thermal Power's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What We Can Learn From Inner Mongolia MengDian HuaNeng Thermal 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.

As we suspected, our examination of Inner Mongolia MengDian HuaNeng Thermal Power's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

Having said that, be aware Inner Mongolia MengDian HuaNeng Thermal Power is showing 1 warning sign 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.