Guangzhou Sie Consulting Co., Ltd. (SZSE:300687) shareholders are no doubt pleased to see that the share price has bounced 30% in the last month, although it is still struggling to make up recently lost ground. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 40% in the last twelve months.
Following the firm bounce in price, Guangzhou Sie Consulting may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 35.7x, since almost half of all companies in China have P/E ratios under 30x and even P/E's lower than 18x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.
Guangzhou Sie Consulting has been struggling lately as its earnings have declined faster than most other companies. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
Does Growth Match The High P/E?
In order to justify its P/E ratio, Guangzhou Sie Consulting would need to produce impressive growth in excess of the market.
Retrospectively, the last year delivered a frustrating 4.1% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 53% overall rise in EPS, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.
Shifting to the future, estimates from the nine analysts covering the company suggest earnings should grow by 46% over the next year. With the market only predicted to deliver 41%, the company is positioned for a stronger earnings result.
In light of this, it's understandable that Guangzhou Sie Consulting's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
The Bottom Line On Guangzhou Sie Consulting's P/E
Guangzhou Sie Consulting shares have received a push in the right direction, but its P/E is elevated too. 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 Guangzhou Sie Consulting maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.
Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Guangzhou Sie Consulting that you should be aware of.
You might be able to find a better investment than Guangzhou Sie Consulting. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).
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