Guangdong Provincial Expressway Development Co., Ltd.'s (SZSE:000429) Shares Bounce 26% But Its Business Still Trails The Market

The Guangdong Provincial Expressway Development Co., Ltd. (SZSE:000429) share price has done very well over the last month, posting an excellent gain of 26%. The last 30 days bring the annual gain to a very sharp 68%.

Even after such a large jump in price, Guangdong Provincial Expressway Development's price-to-earnings (or "P/E") ratio of 18.8x 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 35x and even P/E's above 68x 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 limited.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Guangdong Provincial Expressway Development has been doing quite well of late. 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 not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Guangdong Provincial Expressway Development

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Does Growth Match The Low P/E?

The only time you'd be truly comfortable seeing a P/E as low as Guangdong Provincial Expressway Development's is when the company's growth is on track to lag the market.

If we review the last year of earnings growth, the company posted a worthy increase of 13%. However, this wasn't enough as the latest three year period has seen an unpleasant 12% overall drop in EPS. 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 0.1% as estimated by the three analysts watching the company. With the market predicted to deliver 38% growth , the company is positioned for a weaker earnings result.

With this information, we can see why Guangdong Provincial Expressway Development 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 Key Takeaway

The latest share price surge wasn't enough to lift Guangdong Provincial Expressway Development's P/E close to the market median. 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 Provincial Expressway Development maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Guangdong Provincial Expressway Development that you need to be mindful of.

Of course, you might also be able to find a better stock than Guangdong Provincial Expressway Development. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.