Guangzhou Haige Communications Group Incorporated Company's (SZSE:002465) Business Is Trailing The Market But Its Shares Aren't

Guangzhou Haige Communications Group Incorporated Company's (SZSE:002465) price-to-earnings (or "P/E") ratio of 37.7x might make it look like a sell right now compared to the market in China, where around half of the companies have P/E ratios below 29x and even P/E's below 18x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

There hasn't been much to differentiate Guangzhou Haige Communications Group's and the market's earnings growth lately. It might be that many expect the mediocre earnings performance to strengthen positively, which has kept the P/E from falling. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Guangzhou Haige Communications Group

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What Are Growth Metrics Telling Us About The High P/E?

Guangzhou Haige Communications Group's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

Retrospectively, the last year delivered a decent 2.8% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen an unpleasant 1.6% overall drop in EPS. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the five analysts covering the company suggest earnings should grow by 20% per year over the next three years. With the market predicted to deliver 25% growth each year, the company is positioned for a weaker earnings result.

In light of this, it's alarming that Guangzhou Haige Communications Group's P/E sits above the majority of other companies. 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. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Key Takeaway

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Guangzhou Haige Communications Group 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. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Guangzhou Haige Communications Group that you need to be mindful of.

If these risks are making you reconsider your opinion on Guangzhou Haige Communications Group, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.

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