Improved Earnings Required Before Gree Electric Appliances, Inc. of Zhuhai (SZSE:000651) Shares Find Their Feet

When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 37x, you may consider Gree Electric Appliances, Inc. of Zhuhai (SZSE:000651) as a highly attractive investment with its 7.8x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

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 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 out of favour.

See our latest analysis for Gree Electric Appliances of Zhuhai

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Gree Electric Appliances of Zhuhai.

Is There Any Growth For Gree Electric Appliances of Zhuhai?

In order to justify its P/E ratio, Gree Electric Appliances of Zhuhai would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered an exceptional 18% gain to the company's bottom line. Pleasingly, EPS has also lifted 35% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the analysts covering the company suggest earnings growth is heading into negative territory, declining 2.4% per annum over the next three years. With the market predicted to deliver 20% growth each year, that's a disappointing outcome.

With this information, we are not surprised that Gree Electric Appliances of Zhuhai 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. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Key Takeaway

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 Gree Electric Appliances of Zhuhai maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

Plus, you should also learn about this 1 warning sign we've spotted with Gree Electric Appliances of Zhuhai.

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.