China Power International Development Limited (HKG:2380) Investors Are Less Pessimistic Than Expected

It's not a stretch to say that China Power International Development Limited's (HKG:2380) price-to-earnings (or "P/E") ratio of 10.7x right now seems quite "middle-of-the-road" compared to the market in Hong Kong, where the median P/E ratio is around 11x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

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China Power International Development certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

View our latest analysis for China Power International Development

If you'd like to see what analysts are forecasting going forward, you should check out our free report on China Power International Development.

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

In order to justify its P/E ratio, China Power International Development would need to produce growth that's similar to the market.

Retrospectively, the last year delivered an exceptional 26% gain to the company's bottom line. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Looking ahead now, EPS is anticipated to climb by 11% per annum during the coming three years according to the seven analysts following the company. That's shaping up to be materially lower than the 15% each year growth forecast for the broader market.

In light of this, it's curious that China Power International Development's P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

The Bottom Line On China Power International Development'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 Power International Development currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

We don't want to rain on the parade too much, but we did also find 2 warning signs for China Power International Development (1 doesn't sit too well with us!) that you need to be mindful of.

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.