It's A Story Of Risk Vs Reward With Tianneng Power International Limited (HKG:819)

When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") above 12x, you may consider Tianneng Power International Limited (HKG:819) as an attractive investment with its 6.1x 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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Tianneng Power International hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. 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 Tianneng Power International

How Is Tianneng Power International's Growth Trending?

In order to justify its P/E ratio, Tianneng Power International would need to produce sluggish growth that's trailing the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 37%. The last three years don't look nice either as the company has shrunk EPS by 12% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 23% per annum as estimated by the three analysts watching the company. With the market only predicted to deliver 15% per annum, the company is positioned for a stronger earnings result.

With this information, we find it odd that Tianneng Power International is trading at a P/E lower than the market. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

The Key Takeaway

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Tianneng Power International currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook 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, but investors seem to think future earnings could see a lot of volatility.

Having said that, be aware Tianneng Power International is showing 1 warning sign in our investment analysis, you should know about.

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