With a price-to-earnings (or "P/E") ratio of 11.8x Guangdong Homa Group Co., Ltd. (SZSE:002668) may be sending very bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 35x and even P/E's higher than 62x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.
Recent times have been pleasing for Guangdong Homa Group as its earnings have risen in spite of the market's earnings going into reverse. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. 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.
See our latest analysis for Guangdong Homa Group
Does Growth Match The Low P/E?
The only time you'd be truly comfortable seeing a P/E as depressed as Guangdong Homa Group's is when the company's growth is on track to lag the market decidedly.
Taking a look back first, we see that the company grew earnings per share by an impressive 366% last year. Still, EPS has barely risen at all from three years ago in total, which is not ideal. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.
Turning to the outlook, the next three years should generate growth of 10% per year as estimated by the dual analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 25% per annum, which is noticeably more attractive.
With this information, we can see why Guangdong Homa Group is trading at a P/E lower than the market. 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 Guangdong Homa Group's P/E
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.
As we suspected, our examination of Guangdong Homa Group'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. It's hard to see the share price rising strongly in the near future under these circumstances.
A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for Guangdong Homa Group with six simple checks will allow you to discover any risks that could be an issue.
If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
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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.