Guangzhou Guangri Stock Co.,Ltd. (SHSE:600894) Surges 27% Yet Its Low P/E Is No Reason For Excitement

Guangzhou Guangri Stock Co.,Ltd. (SHSE:600894) shareholders would be excited to see that the share price has had a great month, posting a 27% gain and recovering from prior weakness. Looking further back, the 14% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

In spite of the firm bounce in price, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 31x, you may still consider Guangzhou Guangri StockLtd as a highly attractive investment with its 12.2x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

The earnings growth achieved at Guangzhou Guangri StockLtd over the last year would be more than acceptable for most companies. One possibility is that the P/E is low because investors think this respectable earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

Check out our latest analysis for Guangzhou Guangri StockLtd

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Guangzhou Guangri StockLtd will help you shine a light on its historical performance.

Is There Any Growth For Guangzhou Guangri StockLtd?

In order to justify its P/E ratio, Guangzhou Guangri StockLtd would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered a decent 8.5% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen an unpleasant 1.7% overall drop in EPS. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 41% shows it's an unpleasant look.

With this information, we are not surprised that Guangzhou Guangri StockLtd is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Key Takeaway

Guangzhou Guangri StockLtd'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 Guangzhou Guangri StockLtd revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Guangzhou Guangri StockLtd you should know about.

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.