China Great Wall Securities Co.,Ltd.'s (SZSE:002939) price-to-earnings (or "P/E") ratio of 19.2x might make it look like a buy right now compared to the market in China, where around half of the companies have P/E ratios above 30x and even P/E's above 53x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

China Great Wall SecuritiesLtd certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. 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.

Is There Any Growth For China Great Wall SecuritiesLtd?

There's an inherent assumption that a company should underperform the market for P/E ratios like China Great Wall SecuritiesLtd's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 22% gain to the company's bottom line. Still, incredibly EPS has fallen 15% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next year should generate growth of 25% as estimated by the only analyst watching the company. Meanwhile, the rest of the market is forecast to expand by 35%, which is noticeably more attractive.

With this information, we can see why China Great Wall SecuritiesLtd 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.

The Final Word

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.

As we suspected, our examination of China Great Wall SecuritiesLtd'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.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for China Great Wall SecuritiesLtd (1 shouldn't be ignored) you should be aware of.

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.