Gree Electric Appliances, Inc. of Zhuhai's (SZSE:000651) Earnings Are Not Doing Enough For Some Investors

When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 30x, you may consider Gree Electric Appliances, Inc. of Zhuhai (SZSE:000651) as a highly attractive investment with its 8.7x 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.

Recent times have been pleasing for Gree Electric Appliances of Zhuhai as its earnings have risen in spite of the market's earnings going into reverse. 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 Gree Electric Appliances of Zhuhai

Keen to find out how analysts think Gree Electric Appliances of Zhuhai's future stacks up against the industry? In that case, our free report is a great place to start.

Does Growth Match The Low P/E?

The only time you'd be truly comfortable seeing a P/E as depressed as Gree Electric Appliances of Zhuhai's is when the company's growth is on track to lag the market decidedly.

Retrospectively, the last year delivered an exceptional 16% gain to the company's bottom line. EPS has also lifted 29% in aggregate from three years ago, mostly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 0.09% per annum over the next three years. That's shaping up to be materially lower than the 19% each year growth forecast for the broader market.

With this information, we can see why Gree Electric Appliances of Zhuhai 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.

The Final Word

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Gree Electric Appliances of Zhuhai maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 1 warning sign for Gree Electric Appliances of Zhuhai you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on 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.