Chengdu Guibao Science & Technology Co.,Ltd. (SZSE:300019) shares have had a really impressive month, gaining 31% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 41%.
Even after such a large jump in price, Chengdu Guibao Science & TechnologyLtd's price-to-earnings (or "P/E") ratio of 29x might still make it look like a buy right now compared to the market in China, where around half of the companies have P/E ratios above 33x and even P/E's above 59x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
Recent times have been advantageous for Chengdu Guibao Science & TechnologyLtd as its earnings have been rising faster than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.
View our latest analysis for Chengdu Guibao Science & TechnologyLtd
SZSE:300019 Price Based on Past Earnings June 14th 2022 Keen to find out how analysts think Chengdu Guibao Science & TechnologyLtd's future stacks up against the industry? In that case, our free report is a great place to start.What Are Growth Metrics Telling Us About The Low P/E?
Chengdu Guibao Science & TechnologyLtd's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.
Retrospectively, the last year delivered a decent 11% gain to the company's bottom line. Pleasingly, EPS has also lifted 195% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Shifting to the future, estimates from the dual analysts covering the company suggest earnings should grow by 26% each year over the next three years. Meanwhile, the rest of the market is forecast to expand by 25% per year, which is not materially different.
With this information, we find it odd that Chengdu Guibao Science & TechnologyLtd is trading at a P/E lower than the market. It may be that most investors are not convinced the company can achieve future growth expectations.
What We Can Learn From Chengdu Guibao Science & TechnologyLtd's P/E?
The latest share price surge wasn't enough to lift Chengdu Guibao Science & TechnologyLtd's P/E close to the market median. 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 Chengdu Guibao Science & TechnologyLtd currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. When we see an average earnings outlook with market-like 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 more support to the share price.
It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Chengdu Guibao Science & TechnologyLtd (at least 1 which is concerning), and understanding these should be part of your investment process.
If these risks are making you reconsider your opinion on Chengdu Guibao Science & TechnologyLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.
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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.