Some Confidence Is Lacking In Guangzhou Guanggang Gases & Energy Co.,Ltd.'s (SHSE:688548) P/E

When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 36x, you may consider Guangzhou Guanggang Gases & Energy Co.,Ltd. (SHSE:688548) as a stock to potentially avoid with its 53.2x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Guangzhou Guanggang Gases & EnergyLtd has been struggling lately as its earnings have declined faster than most other companies. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

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How Is Guangzhou Guanggang Gases & EnergyLtd's Growth Trending?

There's an inherent assumption that a company should outperform the market for P/E ratios like Guangzhou Guanggang Gases & EnergyLtd's to be considered reasonable.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 38%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 38% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Turning to the outlook, the next year should generate growth of 34% as estimated by the five analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 38%, which is noticeably more attractive.

With this information, we find it concerning that Guangzhou Guanggang Gases & EnergyLtd is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Guangzhou Guanggang Gases & EnergyLtd currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Guangzhou Guanggang Gases & EnergyLtd (at least 1 which is potentially serious), and understanding them should be part of your investment process.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.