The Market Doesn't Like What It Sees From Guangdong Provincial Expressway Development Co., Ltd.'s (SZSE:000429) Earnings Yet

When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 32x, you may consider Guangdong Provincial Expressway Development Co., Ltd. (SZSE:000429) as a highly attractive investment with its 13x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

With earnings growth that's superior to most other companies of late, Guangdong Provincial Expressway Development has been doing relatively well. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. 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 Guangdong Provincial Expressway Development

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Does Growth Match The Low P/E?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Guangdong Provincial Expressway Development's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 30%. The latest three year period has also seen a 21% overall rise in EPS, aided extensively by its short-term performance. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 1.1% per year as estimated by the four analysts watching the company. That's shaping up to be materially lower than the 25% each year growth forecast for the broader market.

With this information, we can see why Guangdong Provincial Expressway Development 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 Guangdong Provincial Expressway Development's P/E

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

It is also worth noting that we have found 1 warning sign for Guangdong Provincial Expressway Development that you need to take into consideration.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on 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.