GUOMAI Culture & Media Co., Ltd.'s (SZSE:301052) 27% Cheaper Price Remains In Tune With Earnings

GUOMAI Culture & Media Co., Ltd. (SZSE:301052) shares have had a horrible month, losing 27% 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 36% share price drop.

Although its price has dipped substantially, GUOMAI Culture & Media may still be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 79.9x, since almost half of all companies in China have P/E ratios under 29x and even P/E's lower than 18x 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 lofty.

While the market has experienced earnings growth lately, GUOMAI Culture & Media's earnings have gone into reverse gear, which is not great. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for GUOMAI Culture & Media

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Does Growth Match The High P/E?

GUOMAI Culture & Media's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

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 39%. The last three years don't look nice either as the company has shrunk EPS by 43% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next year should generate growth of 298% as estimated by the one analyst watching the company. Meanwhile, the rest of the market is forecast to only expand by 34%, which is noticeably less attractive.

With this information, we can see why GUOMAI Culture & Media is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

GUOMAI Culture & Media's shares may have retreated, but its P/E is still flying high. 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 GUOMAI Culture & Media maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

Having said that, be aware GUOMAI Culture & Media is showing 2 warning signs in our investment analysis, and 1 of those can't be ignored.

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.