When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 34x, you may consider Guangzhou Metro Design & Research Institute Co., Ltd. (SZSE:003013) as an attractive investment with its 17.2x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
Guangzhou Metro Design & Research Institute 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. 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 not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
See our latest analysis for Guangzhou Metro Design & Research Institute
What Are Growth Metrics Telling Us About The Low P/E?
There's an inherent assumption that a company should underperform the market for P/E ratios like Guangzhou Metro Design & Research Institute's to be considered reasonable.
Taking a look back first, we see that the company grew earnings per share by an impressive 48% last year. Pleasingly, EPS has also lifted 37% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Turning to the outlook, the next year should generate growth of 30% as estimated by the only analyst watching the company. With the market predicted to deliver 43% growth , the company is positioned for a weaker earnings result.
With this information, we can see why Guangzhou Metro Design & Research Institute is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.
What We Can Learn From Guangzhou Metro Design & Research Institute's P/E?
It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
As we suspected, our examination of Guangzhou Metro Design & Research Institute'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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
You need to take note of risks, for example - Guangzhou Metro Design & Research Institute has 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.
If these risks are making you reconsider your opinion on Guangzhou Metro Design & Research Institute, 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.