China Great Wall Securities Co.,Ltd.'s (SZSE:002939) price-to-earnings (or "P/E") ratio of 20.9x might make it look like a buy right now compared to the market in China, where around half of the companies have P/E ratios above 36x and even P/E's above 65x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
Recent times have been pleasing for China Great Wall SecuritiesLtd as its earnings have risen in spite of the market's earnings going into reverse. 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.
Check out our latest analysis for China Great Wall SecuritiesLtd
What Are Growth Metrics Telling Us About The Low P/E?
The only time you'd be truly comfortable seeing a P/E as low as China Great Wall SecuritiesLtd's is when the company's growth is on track to lag the market.
If we review the last year of earnings growth, the company posted a terrific increase of 22%. Still, incredibly EPS has fallen 15% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
Looking ahead now, EPS is anticipated to climb by 25% during the coming year according to the only analyst following the company. That's shaping up to be materially lower than the 44% growth forecast for the broader market.
In light of this, it's understandable that China Great Wall SecuritiesLtd'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
Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
As we suspected, our examination of China Great Wall SecuritiesLtd'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.
It is also worth noting that we have found 2 warning signs for China Great Wall SecuritiesLtd (1 makes us a bit uncomfortable!) that you need to take into consideration.
If you're unsure about the strength of China Great Wall SecuritiesLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.