Market Participants Recognise Guangxi Guiguan Electric PowerCo.,Ltd.'s (SHSE:600236) Earnings

When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 32x, you may consider Guangxi Guiguan Electric PowerCo.,Ltd. (SHSE:600236) as a stock to potentially avoid with its 38.9x 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 as high as it is.

Guangxi Guiguan Electric PowerCo.Ltd hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. 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.

Check out our latest analysis for Guangxi Guiguan Electric PowerCo.Ltd

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Guangxi Guiguan Electric PowerCo.Ltd.

Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as high as Guangxi Guiguan Electric PowerCo.Ltd's is when the company's growth is on track to outshine the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 49%. As a result, earnings from three years ago have also fallen 39% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 41% each year over the next three years. With the market only predicted to deliver 26% each year, the company is positioned for a stronger earnings result.

With this information, we can see why Guangxi Guiguan Electric PowerCo.Ltd is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

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.

As we suspected, our examination of Guangxi Guiguan Electric PowerCo.Ltd's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. 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.

Before you settle on your opinion, we've discovered 3 warning signs for Guangxi Guiguan Electric PowerCo.Ltd (2 make us uncomfortable!) that you should be aware of.

You might be able to find a better investment than Guangxi Guiguan Electric PowerCo.Ltd. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.