When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 30x, you may consider Guangzhou Holike Creative Home Co.,Ltd. (SHSE:603898) as a highly attractive investment with its 12.7x P/E ratio. 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.
Recent times have been pleasing for Guangzhou Holike Creative HomeLtd 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 not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
View our latest analysis for Guangzhou Holike Creative HomeLtd
Does Growth Match The Low P/E?
In order to justify its P/E ratio, Guangzhou Holike Creative HomeLtd would need to produce anemic growth that's substantially trailing the market.
Retrospectively, the last year delivered a decent 7.2% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen an unpleasant 16% overall drop in EPS. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
Turning to the outlook, the next year should generate growth of 36% as estimated by the four analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 42%, which is noticeably more attractive.
In light of this, it's understandable that Guangzhou Holike Creative HomeLtd'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 Bottom Line On Guangzhou Holike Creative HomeLtd'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 Guangzhou Holike Creative HomeLtd maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. 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 2 warning signs for Guangzhou Holike Creative HomeLtd you should know about.
If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
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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.
