GSP Automotive Group Wenzhou Co.,Ltd. (SHSE:605088) Shares Fly 25% But Investors Aren't Buying For Growth

The GSP Automotive Group Wenzhou Co.,Ltd. (SHSE:605088) share price has done very well over the last month, posting an excellent gain of 25%. Looking back a bit further, it's encouraging to see the stock is up 65% in the last year.

In spite of the firm bounce in price, GSP Automotive Group WenzhouLtd's price-to-earnings (or "P/E") ratio of 18.1x might still 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 37x and even P/E's above 72x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

The recently shrinking earnings for GSP Automotive Group WenzhouLtd have been in line with the market. One possibility is that the P/E is low because investors think the company's earnings may begin to slide even faster. You'd much rather the company wasn't bleeding earnings if you still believe in the business. In saying that, existing shareholders may feel hopeful about the share price if the company's earnings continue tracking the market.

See our latest analysis for GSP Automotive Group WenzhouLtd

If you'd like to see what analysts are forecasting going forward, you should check out our free report on GSP Automotive Group WenzhouLtd.

Is There Any Growth For GSP Automotive Group WenzhouLtd?

There's an inherent assumption that a company should far underperform the market for P/E ratios like GSP Automotive Group WenzhouLtd's to be considered reasonable.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 2.1%. Still, the latest three year period has seen an excellent 150% overall rise in EPS, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the two analysts covering the company suggest earnings should grow by 17% over the next year. With the market predicted to deliver 38% growth , the company is positioned for a weaker earnings result.

With this information, we can see why GSP Automotive Group WenzhouLtd is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

What We Can Learn From GSP Automotive Group WenzhouLtd's P/E?

GSP Automotive Group WenzhouLtd's recent share price jump still sees its P/E sitting firmly flat on the ground. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of GSP Automotive Group WenzhouLtd'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. It's hard to see the share price rising strongly in the near future under these circumstances.

Before you take the next step, you should know about the 2 warning signs for GSP Automotive Group WenzhouLtd (1 is significant!) that we have uncovered.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.