With a price-to-earnings (or "P/E") ratio of 16.7x Guosen Securities Co., Ltd. (SZSE:002736) may be sending bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 30x and even P/E's higher than 53x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.
Guosen Securities' earnings growth of late has been pretty similar to most other companies. It might be that many expect the mediocre earnings performance to degrade, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could pick up some stock while it's out of favour.
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 Guosen Securities' to be considered reasonable.
If we review the last year of earnings growth, the company posted a worthy increase of 3.0%. Still, lamentably EPS has fallen 26% in aggregate from three years ago, which is disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Looking ahead now, EPS is anticipated to climb by 18% per year during the coming three years according to the three analysts following the company. With the market predicted to deliver 21% growth per annum, the company is positioned for a weaker earnings result.
With this information, we can see why Guosen Securities 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 Guosen Securities' 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 Guosen Securities' 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. It's hard to see the share price rising strongly in the near future under these circumstances.
Plus, you should also learn about these 3 warning signs we've spotted with Guosen Securities (including 2 which are a bit concerning).
Of course, you might also be able to find a better stock than Guosen Securities. 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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