Guangdong Provincial Expressway Development Co., Ltd.'s (SZSE:200429) price-to-earnings (or "P/E") ratio of 6.9x might make it look like a strong 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 62x 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 so limited.

Guangdong Provincial Expressway Development has been struggling lately as its earnings have declined faster than most other companies. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.

See our latest analysis for Guangdong Provincial Expressway Development

What Are Growth Metrics Telling Us About The Low P/E?

Guangdong Provincial Expressway Development's P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 20%. The last three years don't look nice either as the company has shrunk EPS by 4.5% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 16% during the coming year according to the twin analysts following the company. That's shaping up to be materially lower than the 42% growth forecast for the broader market.

In light of this, it's understandable that Guangdong Provincial Expressway Development's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Final Word

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

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.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Guangdong Provincial Expressway Development you should know about.

If you're unsure about the strength of Guangdong Provincial Expressway Development'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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