When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") above 10x, you may consider Genertec Universal Medical Group Company Limited (HKG:2666) as a highly attractive investment with its 4.1x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Genertec Universal Medical Group certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. 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 Genertec Universal Medical Group

How Is Genertec Universal Medical Group's Growth Trending?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Genertec Universal Medical Group's to be considered reasonable.

Retrospectively, the last year delivered virtually the same number to the company's bottom line as the year before. Regardless, EPS has managed to lift by a handy 17% in aggregate from three years ago, thanks to the earlier period of growth. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 6.6% each year over the next three years. That's shaping up to be materially lower than the 16% each year growth forecast for the broader market.

In light of this, it's understandable that Genertec Universal Medical Group'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 Key Takeaway

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.

We've established that Genertec Universal Medical Group maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

It is also worth noting that we have found 2 warning signs for Genertec Universal Medical Group (1 makes us a bit uncomfortable!) that you need to take into consideration.

If you're unsure about the strength of Genertec Universal Medical Group's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.