Market Might Still Lack Some Conviction On Guangxi Liugong Machinery Co., Ltd. (SZSE:000528) Even After 36% Share Price Boost

Guangxi Liugong Machinery Co., Ltd. (SZSE:000528) shares have continued their recent momentum with a 36% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 63% in the last year.

Although its price has surged higher, it's still not a stretch to say that Guangxi Liugong Machinery's price-to-earnings (or "P/E") ratio of 25.2x right now seems quite "middle-of-the-road" compared to the market in China, where the median P/E ratio is around 28x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

With earnings growth that's superior to most other companies of late, Guangxi Liugong Machinery has been doing relatively well. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. 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.

See our latest analysis for Guangxi Liugong Machinery

Keen to find out how analysts think Guangxi Liugong Machinery's future stacks up against the industry? In that case, our free report is a great place to start.

Does Growth Match The P/E?

The only time you'd be comfortable seeing a P/E like Guangxi Liugong Machinery's is when the company's growth is tracking the market closely.

Taking a look back first, we see that the company grew earnings per share by an impressive 44% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 51% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 37% per annum during the coming three years according to the four analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 21% per year, which is noticeably less attractive.

In light of this, it's curious that Guangxi Liugong Machinery's P/E sits in line with the majority of other companies. It may be that most investors aren't convinced the company can achieve future growth expectations.

What We Can Learn From Guangxi Liugong Machinery's P/E?

Guangxi Liugong Machinery appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. 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 Guangxi Liugong Machinery currently trades on a lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Guangxi Liugong Machinery that you should be aware of.

You might be able to find a better investment than Guangxi Liugong Machinery. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.