When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 35x, you may consider Guotai Junan Securities Co., Ltd. (SHSE:601211) as a highly attractive investment with its 11.7x 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.
The recently shrinking earnings for Guotai Junan Securities have been in line with the market. It might be that many expect the company's earnings performance to degrade further, which has repressed the P/E. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. In saying that, existing shareholders may feel hopeful about the share price if the company's earnings continue tracking the market.
Check out our latest analysis for Guotai Junan Securities
Does Growth Match The Low P/E?
The only time you'd be truly comfortable seeing a P/E as depressed as Guotai Junan Securities' is when the company's growth is on track to lag the market decidedly.
Taking a look back first, we see that there was hardly any earnings per share growth to speak of for the company over the past year. Still, the latest three year period was better as it's delivered a decent 5.6% overall rise in EPS. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.
Shifting to the future, estimates from the nine analysts covering the company suggest earnings should grow by 24% over the next year. That's shaping up to be materially lower than the 43% growth forecast for the broader market.
In light of this, it's understandable that Guotai Junan Securities' P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.
The Bottom Line On Guotai Junan Securities' P/E
We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
We've established that Guotai Junan Securities 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Guotai Junan Securities that you should be aware of.
Of course, you might also be able to find a better stock than Guotai Junan Securities. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
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.