China Southern Power Grid Energy Storage Co., Ltd.'s (SHSE:600995) Low P/E No Reason For Excitement

With a price-to-earnings (or "P/E") ratio of 26.7x China Southern Power Grid Energy Storage Co., Ltd. (SHSE:600995) may be sending bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 37x and even P/E's higher than 72x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Recent times have been pleasing for China Southern Power Grid Energy Storage as its earnings have risen in spite of the market's earnings going into reverse. 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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How Is China Southern Power Grid Energy Storage's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as low as China Southern Power Grid Energy Storage's is when the company's growth is on track to lag the market.

Taking a look back first, we see that there was hardly any earnings per share growth to speak of for the company over the past year. Still, the latest three year period has seen an excellent 1,352% overall rise in EPS, in spite of its uninspiring short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 17% as estimated by the five analysts watching the company. That's shaping up to be materially lower than the 38% growth forecast for the broader market.

In light of this, it's understandable that China Southern Power Grid Energy Storage'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.

The Final Word

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.

We've established that China Southern Power Grid Energy Storage 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.

Having said that, be aware China Southern Power Grid Energy Storage is showing 2 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable.

If you're unsure about the strength of China Southern Power Grid Energy Storage'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.