It's A Story Of Risk Vs Reward With BGT Group Co., Ltd. (SZSE:300774)

BGT Group Co., Ltd.'s (SZSE:300774) price-to-earnings (or "P/E") ratio of 31x might make it look like a buy right now compared to the market in China, where around half of the companies have P/E ratios above 39x and even P/E's above 77x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

BGT Group certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for BGT Group

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What Are Growth Metrics Telling Us About The Low P/E?

The only time you'd be truly comfortable seeing a P/E as low as BGT Group's is when the company's growth is on track to lag the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 213% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 33% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next year should generate growth of 52% as estimated by the dual analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 37%, which is noticeably less attractive.

With this information, we find it odd that BGT Group is trading at a P/E lower than the market. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

The Bottom Line On BGT Group's P/E

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of BGT Group's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

Before you take the next step, you should know about the 1 warning sign for BGT Group 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).

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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.