What Guizhou Guihang Automotive Components Co.,Ltd's (SHSE:600523) 27% Share Price Gain Is Not Telling You

Guizhou Guihang Automotive Components Co.,Ltd (SHSE:600523) shareholders have had their patience rewarded with a 27% share price jump in the last month. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 5.0% over the last year.

Although its price has surged higher, it's still not a stretch to say that Guizhou Guihang Automotive ComponentsLtd's price-to-earnings (or "P/E") ratio of 29x right now seems quite "middle-of-the-road" compared to the market in China, where the median P/E ratio is around 30x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Earnings have risen firmly for Guizhou Guihang Automotive ComponentsLtd recently, which is pleasing to see. One possibility is that the P/E is moderate because investors think this respectable earnings growth might not be enough to outperform the broader market in the near future. 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 not quite in favour.

View our latest analysis for Guizhou Guihang Automotive ComponentsLtd

Although there are no analyst estimates available for Guizhou Guihang Automotive ComponentsLtd, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Some Growth For Guizhou Guihang Automotive ComponentsLtd?

In order to justify its P/E ratio, Guizhou Guihang Automotive ComponentsLtd would need to produce growth that's similar to the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 23% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 4.8% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 36% shows it's an unpleasant look.

In light of this, it's somewhat alarming that Guizhou Guihang Automotive ComponentsLtd's P/E sits in line with the majority of other companies. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Bottom Line On Guizhou Guihang Automotive ComponentsLtd's P/E

Its shares have lifted substantially and now Guizhou Guihang Automotive ComponentsLtd's P/E is also back up to the market median. 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.

We've established that Guizhou Guihang Automotive ComponentsLtd currently trades on a higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Guizhou Guihang Automotive ComponentsLtd you should know about.

If you're unsure about the strength of Guizhou Guihang Automotive ComponentsLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.