Guangdong Chant Group Inc.'s (SZSE:002616) Earnings Are Not Doing Enough For Some Investors

With a price-to-earnings (or "P/E") ratio of 20.4x Guangdong Chant Group Inc. (SZSE:002616) may be sending bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 34x and even P/E's higher than 65x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Earnings have risen firmly for Guangdong Chant Group recently, which is pleasing to see. It might be that many expect the respectable earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

View our latest analysis for Guangdong Chant Group

Although there are no analyst estimates available for Guangdong Chant Group, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Guangdong Chant Group's Growth Trending?

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

Retrospectively, the last year delivered a decent 11% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen an unpleasant 38% overall drop in EPS. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Comparing that to the market, which is predicted to deliver 36% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

With this information, we are not surprised that Guangdong Chant Group is trading at a P/E lower than the market. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Key Takeaway

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of Guangdong Chant Group revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Guangdong Chant Group (2 are significant!) that you need to be mindful of.

You might be able to find a better investment than Guangdong Chant Group. 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.