Earnings Not Telling The Story For Zhuzhou CRRC Times Electric Co., Ltd. (HKG:3898)

With a price-to-earnings (or "P/E") ratio of 12.9x Zhuzhou CRRC Times Electric Co., Ltd. (HKG:3898) may be sending bearish signals at the moment, given that almost half of all companies in Hong Kong have P/E ratios under 9x and even P/E's lower than 5x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's superior to most other companies of late, Zhuzhou CRRC Times Electric has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Zhuzhou CRRC Times Electric

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Zhuzhou CRRC Times Electric.

Does Growth Match The High P/E?

In order to justify its P/E ratio, Zhuzhou CRRC Times Electric would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered an exceptional 21% gain to the company's bottom line. As a result, it also grew EPS by 8.0% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 12% per year during the coming three years according to the analysts following the company. That's shaping up to be materially lower than the 16% per year growth forecast for the broader market.

With this information, we find it concerning that Zhuzhou CRRC Times Electric is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Key Takeaway

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Zhuzhou CRRC Times Electric currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

A lot of potential risks can sit within a company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Zhuzhou CRRC Times Electric with six simple checks.

You might be able to find a better investment than Zhuzhou CRRC Times Electric. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.

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