With a price-to-earnings (or "P/E") ratio of 12.5x Guangdong South New Media Co.,Ltd. (SZSE:300770) may be sending very bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 35x and even P/E's higher than 63x 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 so limited.
Guangdong South New MediaLtd 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.
Check out our latest analysis for Guangdong South New MediaLtd
Does Growth Match The Low P/E?
In order to justify its P/E ratio, Guangdong South New MediaLtd would need to produce anemic growth that's substantially trailing the market.
Taking a look back first, we see that the company managed to grow earnings per share by a handy 4.6% last year. EPS has also lifted 19% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been respectable for the company.
Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 12% over the next year. Meanwhile, the rest of the market is forecast to expand by 43%, which is noticeably more attractive.
With this information, we can see why Guangdong South New MediaLtd 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 Bottom Line On Guangdong South New MediaLtd's P/E
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.
We've established that Guangdong South New MediaLtd 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.
Plus, you should also learn about these 6 warning signs we've spotted with Guangdong South New MediaLtd (including 2 which are a bit concerning).
If these risks are making you reconsider your opinion on Guangdong South New MediaLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.
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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.
