When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") above 11x, you may consider Datang International Power Generation Co., Ltd. (HKG:991) as an attractive investment with its 8.5x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Recent times have been quite advantageous for Datang International Power Generation as its earnings have been rising very briskly. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Datang International Power Generation

Although there are no analyst estimates available for Datang International Power Generation, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Datang International Power Generation's Growth Trending?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 78% last year. Pleasingly, EPS has also lifted 472% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

This is in contrast to the rest of the market, which is expected to grow by 21% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this information, we find it odd that Datang International Power Generation is trading at a P/E lower than the market. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Final Word

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

Our examination of Datang International Power Generation revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.

You should always think about risks. Case in point, we've spotted 2 warning signs for Datang International Power Generation you should be aware of.

Of course, you might also be able to find a better stock than Datang International Power Generation. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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