There wouldn't be many who think Guangdong Investment Limited's (HKG:270) price-to-earnings (or "P/E") ratio of 9.3x is worth a mention when the median P/E in Hong Kong is similar at about 9x. 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.

With only a limited decrease in earnings compared to most other companies of late, Guangdong Investment has been doing relatively well. It might be that many expect the comparatively superior earnings performance to vanish, which has kept the P/E from rising. You'd much rather the company wasn't bleeding earnings if you still believe in the business. But at the very least, you'd be hoping the company doesn't fall back into the pack if your plan is to pick up some stock while it's not in favour.

Check out our latest analysis for Guangdong Investment

Does Growth Match The P/E?

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

Retrospectively, the last year delivered virtually the same number to the company's bottom line as the year before. This isn't what shareholders were looking for as it means they've been left with a 3.2% decline in EPS over the last three years in total. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to climb by 8.0% per year during the coming three years according to the eight analysts following the company. Meanwhile, the rest of the market is forecast to expand by 14% each year, which is noticeably more attractive.

In light of this, it's curious that Guangdong Investment's P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

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.

We've established that Guangdong Investment 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. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Plus, you should also learn about these 2 warning signs we've spotted with Guangdong Investment (including 1 which is a bit concerning).

If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/E's below 20x.

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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.