China Design Group Co., Ltd.'s (SHSE:603018) price-to-earnings (or "P/E") ratio of 6.3x might make it look like a strong buy right now compared to the market in China, where around half of the companies have P/E ratios above 28x and even P/E's above 50x are quite common. 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.
With its earnings growth in positive territory compared to the declining earnings of most other companies, China Design Group has been doing quite well of late. 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.
How Is China Design Group's Growth Trending?
In order to justify its P/E ratio, China Design Group would need to produce anemic growth that's substantially trailing the market.
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. Fortunately, a few good years before that means that it was still able to grow EPS by 24% in total over the last three years. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.
Shifting to the future, estimates from the seven analysts covering the company suggest earnings should grow by 16% over the next year. That's shaping up to be materially lower than the 41% growth forecast for the broader market.
In light of this, it's understandable that China Design Group's 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.
What We Can Learn From China Design Group'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 China Design Group's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.
There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for China Design Group that you should be aware of.
Of course, you might also be able to find a better stock than China Design Group. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
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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.