Cautious Investors Not Rewarding China Power International Development Limited's (HKG:2380) Performance Completely

When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") above 13x, you may consider China Power International Development Limited (HKG:2380) as an attractive investment with its 10.5x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

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While the market has experienced earnings growth lately, China Power International Development's earnings have gone into reverse gear, which is not great. 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.

View our latest analysis for China Power International Development

Keen to find out how analysts think China Power International Development's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Any Growth For China Power International Development?

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

Retrospectively, the last year delivered a frustrating 4.8% decrease to the company's bottom line. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Turning to the outlook, the next three years should generate growth of 13% per annum as estimated by the nine analysts watching the company. That's shaping up to be similar to the 14% per year growth forecast for the broader market.

With this information, we find it odd that China Power International Development is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting lower selling prices.

The Key Takeaway

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 Power International Development currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. When we see an average earnings outlook with market-like growth, we assume potential risks are what might be placing pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because these conditions should normally provide more support to the share price.

And what about other risks? Every company has them, and we've spotted 2 warning signs for China Power International Development (of which 1 can't be ignored!) you should know about.

You might be able to find a better investment than China Power International Development. 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.