Guangzhou Great Power Energy and Technology Co., Ltd (SZSE:300438) shares have had a really impressive month, gaining 27% after a shaky period beforehand. But the last month did very little to improve the 53% share price decline over the last year.

In spite of the firm bounce in price, you could still be forgiven for feeling indifferent about Guangzhou Great Power Energy and Technology's P/E ratio of 28.6x, since the median price-to-earnings (or "P/E") ratio in China is also close to 31x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

With earnings that are retreating more than the market's of late, Guangzhou Great Power Energy and Technology has been very sluggish. It might be that many expect the dismal earnings performance to revert back to market averages soon, which has kept the P/E from falling. You'd much rather the company wasn't bleeding earnings if you still believe in the business. If not, then existing shareholders may be a little nervous about the viability of the share price.

Is There Some Growth For Guangzhou Great Power Energy and Technology?

The only time you'd be comfortable seeing a P/E like Guangzhou Great Power Energy and Technology's is when the company's growth is tracking the market closely.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 4.3%. Still, the latest three year period has seen an excellent 874% overall rise in EPS, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Shifting to the future, estimates from the seven analysts covering the company suggest earnings should grow by 55% over the next year. Meanwhile, the rest of the market is forecast to only expand by 41%, which is noticeably less attractive.

With this information, we find it interesting that Guangzhou Great Power Energy and Technology is trading at a fairly similar P/E to the market. It may be that most investors aren't convinced the company can achieve future growth expectations.

What We Can Learn From Guangzhou Great Power Energy and Technology's P/E?

Guangzhou Great Power Energy and Technology's stock has a lot of momentum behind it lately, which has brought its P/E level with the market. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Guangzhou Great Power Energy and Technology's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E as much as we would have predicted. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

You need to take note of risks, for example - Guangzhou Great Power Energy and Technology has 3 warning signs (and 1 which is a bit concerning) we think you should know about.

If these risks are making you reconsider your opinion on Guangzhou Great Power Energy and Technology, explore our interactive list of high quality stocks to get an idea of what else is out there.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.