Investors Don't See Light At End Of Guangzhou Kingmed Diagnostics Group Co., Ltd.'s (SHSE:603882) Tunnel And Push Stock Down 26%

Guangzhou Kingmed Diagnostics Group Co., Ltd. (SHSE:603882) shares have had a horrible month, losing 26% after a relatively good period beforehand. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 46% share price drop.

Even after such a large drop in price, Guangzhou Kingmed Diagnostics Group's price-to-earnings (or "P/E") ratio of 24.5x might still 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 28x and even P/E's above 50x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Guangzhou Kingmed Diagnostics Group could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If you still 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.

Check out our latest analysis for Guangzhou Kingmed Diagnostics Group

Keen to find out how analysts think Guangzhou Kingmed Diagnostics Group's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Guangzhou Kingmed Diagnostics Group's Growth Trending?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 71%. As a result, earnings from three years ago have also fallen 24% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the eleven analysts covering the company suggest earnings should grow by 22% over the next year. That's shaping up to be materially lower than the 36% growth forecast for the broader market.

In light of this, it's understandable that Guangzhou Kingmed Diagnostics Group's P/E sits below the majority of other companies. 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

Guangzhou Kingmed Diagnostics Group's recently weak share price has pulled its P/E below most other companies. 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.

As we suspected, our examination of Guangzhou Kingmed Diagnostics Group's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Before you settle on your opinion, we've discovered 2 warning signs for Guangzhou Kingmed Diagnostics Group (1 doesn't sit too well with us!) that you should be aware of.

If these risks are making you reconsider your opinion on Guangzhou Kingmed Diagnostics Group, explore our interactive list of high quality stocks to get an idea of what else is out there.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.