There's No Escaping Digital China Group Co., Ltd.'s (SZSE:000034) Muted Earnings Despite A 25% Share Price Rise

Despite an already strong run, Digital China Group Co., Ltd. (SZSE:000034) shares have been powering on, with a gain of 25% in the last thirty days. Looking further back, the 11% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Even after such a large jump in price, Digital China Group's price-to-earnings (or "P/E") ratio of 16.1x 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 30x and even P/E's above 58x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Digital China 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. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Digital China Group

Keen to find out how analysts think Digital China Group's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Digital China Group's Growth Trending?

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

Retrospectively, the last year delivered an exceptional 19% gain to the company's bottom line. Pleasingly, EPS has also lifted 390% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 16% each year as estimated by the seven analysts watching the company. With the market predicted to deliver 19% growth per annum, the company is positioned for a weaker earnings result.

With this information, we can see why Digital China Group is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Bottom Line On Digital China Group's P/E

Digital China Group's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of Digital China Group's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. 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.

Having said that, be aware Digital China Group is showing 2 warning signs in our investment analysis, and 1 of those is concerning.

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.