There's No Escaping Guangdong Homa Group Co., Ltd.'s (SZSE:002668) Muted Earnings Despite A 37% Share Price Rise

Despite an already strong run, Guangdong Homa Group Co., Ltd. (SZSE:002668) shares have been powering on, with a gain of 37% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 50% in the last year.

In spite of the firm bounce in price, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 30x, you may still consider Guangdong Homa Group as an attractive investment with its 14.9x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Guangdong Homa Group certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Guangdong Homa Group

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Is There Any Growth For Guangdong Homa Group?

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

If we review the last year of earnings growth, the company posted a terrific increase of 70%. Still, EPS has barely risen at all from three years ago in total, which is not ideal. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Shifting to the future, estimates from the two analysts covering the company suggest earnings should grow by 11% each year over the next three years. Meanwhile, the rest of the market is forecast to expand by 21% per year, which is noticeably more attractive.

With this information, we can see why Guangdong Homa Group 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 Key Takeaway

Guangdong Homa Group's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. 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.

We've established that Guangdong Homa Group 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for Guangdong Homa Group with six simple checks on some of these key factors.

Of course, you might also be able to find a better stock than Guangdong Homa Group. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.