Earnings Working Against China Three Gorges Renewables (Group) Co.,Ltd.'s (SHSE:600905) Share Price

China Three Gorges Renewables (Group) Co.,Ltd.'s (SHSE:600905) price-to-earnings (or "P/E") ratio of 19.2x might make it look like a buy right now compared to the market in China, where around half of the companies have P/E ratios above 36x and even P/E's above 71x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

With its earnings growth in positive territory compared to the declining earnings of most other companies, China Three Gorges Renewables (Group)Ltd has been doing quite well of late. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. 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 out of favour.

View our latest analysis for China Three Gorges Renewables (Group)Ltd

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Does Growth Match The Low P/E?

China Three Gorges Renewables (Group)Ltd's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

If we review the last year of earnings growth, the company posted a worthy increase of 6.7%. However, due to its less than impressive performance prior to this period, EPS growth is practically non-existent over the last three years overall. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Turning to the outlook, the next three years should generate growth of 16% per annum as estimated by the twelve analysts watching the company. With the market predicted to deliver 21% growth per annum, the company is positioned for a weaker earnings result.

With this information, we can see why China Three Gorges Renewables (Group)Ltd is trading at a P/E lower than the market. 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 Three Gorges Renewables (Group)Ltd's P/E

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that China Three Gorges Renewables (Group)Ltd maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. 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.

It is also worth noting that we have found 2 warning signs for China Three Gorges Renewables (Group)Ltd (1 is a bit concerning!) that you need to take into consideration.

If these risks are making you reconsider your opinion on China Three Gorges Renewables (Group)Ltd, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.