When close to half the companies in China have price-to-earnings ratios (or “P/E’s”) above 33x, you may consider China Automotive Engineering Research Institute Co., Ltd. (SHSE:601965) as an attractive investment with its 23.3x P/E ratio. Nonetheless, we’d need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

China Automotive Engineering Research Institute 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 degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for China Automotive Engineering Research Institute

pe-multiple-vs-industry
SHSE:601965 Price to Earnings Ratio vs Industry May 13th 2024

Keen to find out how analysts think China Automotive Engineering Research Institute’s future stacks up against the industry? In that case, our free report is a great place to start.

How Is China Automotive Engineering Research Institute’s Growth Trending?

The only time you’d be truly comfortable seeing a P/E as low as China Automotive Engineering Research Institute’s is when the company’s growth is on track to lag the market.

Retrospectively, the last year delivered an exceptional 17% gain to the company’s bottom line. The latest three year period has also seen an excellent 33% overall rise in EPS, aided by its short-term performance. Therefore, it’s fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 20% per annum as estimated by the four analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 25% per year, which is noticeably more attractive.

In light of this, it’s understandable that China Automotive Engineering Research Institute’s P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Bottom Line On China Automotive Engineering Research Institute’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.

As we suspected, our examination of China Automotive Engineering Research Institute’s analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn’t great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

It’s always necessary to consider the ever-present spectre of investment risk. We’ve identified 1 warning sign with China Automotive Engineering Research Institute, and understanding should be part of your investment process.

You might be able to find a better investment than China Automotive Engineering Research Institute. 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).

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

Find out whether China Automotive Engineering Research Institute 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.

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