Cautious Investors Not Rewarding Guangdong Yussen Energy Technology Co., Ltd.'s (SZSE:002986) Performance Completely

With a price-to-earnings (or "P/E") ratio of 10.1x Guangdong Yussen Energy Technology Co., Ltd. (SZSE:002986) may be sending very bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 29x and even P/E's higher than 54x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

Guangdong Yussen Energy Technology has been struggling lately as its earnings have declined faster than most other companies. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. 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 Guangdong Yussen Energy Technology

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How Is Guangdong Yussen Energy Technology's Growth Trending?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 8.7%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 223% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Turning to the outlook, the next three years should generate growth of 19% per annum as estimated by the two analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 19% per annum, which is not materially different.

In light of this, it's peculiar that Guangdong Yussen Energy Technology's P/E sits below the majority of other companies. It may be that most investors are not convinced the company can achieve future growth expectations.

The Bottom Line On Guangdong Yussen Energy Technology'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 Guangdong Yussen Energy Technology currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. When we see an average earnings outlook with market-like growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Guangdong Yussen Energy Technology (of which 1 shouldn't be ignored!) you should know about.

If you're unsure about the strength of Guangdong Yussen Energy Technology's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.