Investors Aren't Buying GD Power Development Co.,Ltd's (SHSE:600795) Earnings

With a price-to-earnings (or "P/E") ratio of 9x GD Power Development Co.,Ltd (SHSE:600795) may be sending very bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 37x and even P/E's higher than 72x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

GD Power DevelopmentLtd 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. 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 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 GD Power DevelopmentLtd

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Is There Any Growth For GD Power DevelopmentLtd?

In order to justify its P/E ratio, GD Power DevelopmentLtd would need to produce anemic growth that's substantially trailing the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 174% last year. Pleasingly, EPS has also lifted 308% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 2.3% as estimated by the eight analysts watching the company. That's shaping up to be materially lower than the 38% growth forecast for the broader market.

With this information, we can see why GD Power DevelopmentLtd 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 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 GD Power DevelopmentLtd's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. 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.

We don't want to rain on the parade too much, but we did also find 2 warning signs for GD Power DevelopmentLtd (1 is a bit unpleasant!) that you need to be mindful of.

If you're unsure about the strength of GD Power DevelopmentLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.