Stock Analysis

Pinning Down China Renewable Energy Investment Limited's (HKG:987) P/E Is Difficult Right Now

SEHK:987
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It's not a stretch to say that China Renewable Energy Investment Limited's (HKG:987) price-to-earnings (or "P/E") ratio of 9.6x right now seems quite "middle-of-the-road" compared to the market in Hong Kong, where the median P/E ratio is around 9x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

For example, consider that China Renewable Energy Investment's financial performance has been poor lately as its earnings have been in decline. It might be that many expect the company to put the disappointing earnings performance behind them over the coming period, which has kept the P/E from falling. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

See our latest analysis for China Renewable Energy Investment

pe-multiple-vs-industry
SEHK:987 Price to Earnings Ratio vs Industry January 30th 2024
Want the full picture on earnings, revenue and cash flow for the company? Then our free report on China Renewable Energy Investment will help you shine a light on its historical performance.

Is There Some Growth For China Renewable Energy Investment?

In order to justify its P/E ratio, China Renewable Energy Investment would need to produce growth that's similar to the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 38%. This means it has also seen a slide in earnings over the longer-term as EPS is down 31% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 22% shows it's an unpleasant look.

With this information, we find it concerning that China Renewable Energy Investment is trading at a fairly similar P/E to the market. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh on the share price eventually.

What We Can Learn From China Renewable Energy Investment's P/E?

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.

Our examination of China Renewable Energy Investment revealed its shrinking earnings over the medium-term aren't impacting its P/E as much as we would have predicted, given the market is set to grow. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

You should always think about risks. Case in point, we've spotted 3 warning signs for China Renewable Energy Investment you should be aware of, and 1 of them makes us a bit uncomfortable.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

Valuation is complex, but we're helping make it simple.

Find out whether China Renewable Energy Investment is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.