Potential Upside For Weihai Guangtai Airport Equipment Co.,Ltd (SZSE:002111) Not Without Risk

It's not a stretch to say that Weihai Guangtai Airport Equipment Co.,Ltd's (SZSE:002111) price-to-earnings (or "P/E") ratio of 32x right now seems quite "middle-of-the-road" compared to the market in China, where the median P/E ratio is around 34x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

With earnings that are retreating more than the market's of late, Weihai Guangtai Airport EquipmentLtd has been very sluggish. It might be that many expect the dismal earnings performance to revert back to market averages soon, which has kept the P/E from falling. You'd much rather the company wasn't bleeding earnings if you still believe in the business. If not, then existing shareholders may be a little nervous about the viability of the share price.

View our latest analysis for Weihai Guangtai Airport EquipmentLtd

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Does Growth Match The P/E?

The only time you'd be comfortable seeing a P/E like Weihai Guangtai Airport EquipmentLtd's is when the company's growth is tracking the market closely.

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 11%. As a result, earnings from three years ago have also fallen 61% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the dual analysts covering the company suggest earnings should grow by 51% each year over the next three years. With the market only predicted to deliver 19% per year, the company is positioned for a stronger earnings result.

With this information, we find it interesting that Weihai Guangtai Airport EquipmentLtd is trading at a fairly similar P/E to the market. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

The Key Takeaway

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Weihai Guangtai Airport EquipmentLtd's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E as much as we would have predicted. There could be some unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Weihai Guangtai Airport EquipmentLtd that you should be aware of.

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.