Getting In Cheap On Guangzhou Jet Bio-Filtration Co., Ltd. (SHSE:688026) Is Unlikely

There wouldn't be many who think Guangzhou Jet Bio-Filtration Co., Ltd.'s (SHSE:688026) price-to-earnings (or "P/E") ratio of 29.6x is worth a mention when the median P/E in China is similar at about 28x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Guangzhou Jet Bio-Filtration certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. 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 not quite in favour.

Check out our latest analysis for Guangzhou Jet Bio-Filtration

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How Is Guangzhou Jet Bio-Filtration's Growth Trending?

In order to justify its P/E ratio, Guangzhou Jet Bio-Filtration would need to produce growth that's similar to the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 46% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 61% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 20% per annum as estimated by the dual analysts watching the company. That's shaping up to be materially lower than the 24% per year growth forecast for the broader market.

With this information, we find it interesting that Guangzhou Jet Bio-Filtration is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Bottom Line On Guangzhou Jet Bio-Filtration's P/E

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 Guangzhou Jet Bio-Filtration currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It is also worth noting that we have found 1 warning sign for Guangzhou Jet Bio-Filtration that you need to take into consideration.

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.

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