Giant Network Group Co., Ltd.'s (SZSE:002558) Share Price Boosted 37% But Its Business Prospects Need A Lift Too

Giant Network Group Co., Ltd. (SZSE:002558) shareholders have had their patience rewarded with a 37% share price jump in the last month. Notwithstanding the latest gain, the annual share price return of 2.2% isn't as impressive.

Even after such a large jump in price, Giant Network Group's price-to-earnings (or "P/E") ratio of 21.2x 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 34x and even P/E's above 64x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Giant Network Group certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. 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 out of favour.

See our latest analysis for Giant Network Group

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Giant Network Group.

Does Growth Match The Low P/E?

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

If we review the last year of earnings growth, the company posted a worthy increase of 13%. The solid recent performance means it was also able to grow EPS by 5.7% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 16% per year during the coming three years according to the four analysts following the company. With the market predicted to deliver 19% growth per year, the company is positioned for a weaker earnings result.

With this information, we can see why Giant Network Group is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Bottom Line On Giant Network Group's P/E

Despite Giant Network Group's shares building up a head of steam, its P/E still lags 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.

We've established that Giant Network 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.

You always need to take note of risks, for example - Giant Network Group has 1 warning sign we think you should be aware of.

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.