Guoguang Electric Company Limited (SZSE:002045) Surges 29% Yet Its Low P/E Is No Reason For Excitement

Guoguang Electric Company Limited (SZSE:002045) shareholders have had their patience rewarded with a 29% share price jump in the last month. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 2.1% in the last twelve months.

In spite of the firm bounce in price, Guoguang Electric may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 29.5x, since almost half of all companies in China have P/E ratios greater than 36x and even P/E's higher than 72x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

With earnings that are retreating more than the market's of late, Guoguang Electric has been very sluggish. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. You'd much rather the company wasn't bleeding earnings if you still believe in the business. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.

See our latest analysis for Guoguang Electric

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How Is Guoguang Electric's Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like Guoguang Electric's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 24%. Still, the latest three year period has seen an excellent 56% overall rise in EPS, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Looking ahead now, EPS is anticipated to climb by 24% during the coming year according to the five analysts following the company. With the market predicted to deliver 40% growth , the company is positioned for a weaker earnings result.

With this information, we can see why Guoguang Electric is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Bottom Line On Guoguang Electric's P/E

Despite Guoguang Electric's shares building up a head of steam, its P/E still lags most other companies. 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.

As we suspected, our examination of Guoguang Electric's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. 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.

Before you settle on your opinion, we've discovered 1 warning sign for Guoguang Electric that you should be aware of.

You might be able to find a better investment than Guoguang Electric. 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.