Investors Aren't Buying China Yangtze Power Co., Ltd.'s (SHSE:600900) Earnings

When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 39x, you may consider China Yangtze Power Co., Ltd. (SHSE:600900) as an attractive investment with its 20.7x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

China Yangtze Power certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

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What Are Growth Metrics Telling Us About The Low P/E?

In order to justify its P/E ratio, China Yangtze Power would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered an exceptional 19% gain to the company's bottom line. The latest three year period has also seen a 15% overall rise in EPS, aided extensively by its short-term performance. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 6.3% per year as estimated by the analysts watching the company. That's shaping up to be materially lower than the 19% per year growth forecast for the broader market.

In light of this, it's understandable that China Yangtze Power'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 Bottom Line On China Yangtze Power's P/E

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of China Yangtze 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.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for China Yangtze Power that you should be aware of.

If you're unsure about the strength of China Yangtze Power's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.