To the annoyance of some shareholders, Guangzhou Goaland Energy Conservation Tech. Co., Ltd. (SZSE:300499) shares are down a considerable 26% in the last month, which continues a horrid run for the company. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 19% in that time.

Even after such a large drop in price, Guangzhou Goaland Energy Conservation Tech's price-to-earnings (or "P/E") ratio of 11.6x might still 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 31x and even P/E's above 55x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Guangzhou Goaland Energy Conservation Tech 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 not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for Guangzhou Goaland Energy Conservation Tech

Is There Any Growth For Guangzhou Goaland Energy Conservation Tech?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Guangzhou Goaland Energy Conservation Tech's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 373% last year. Pleasingly, EPS has also lifted 319% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to slump, contracting by 42% during the coming year according to the lone analyst following the company. Meanwhile, the broader market is forecast to expand by 42%, which paints a poor picture.

With this information, we are not surprised that Guangzhou Goaland Energy Conservation Tech is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

What We Can Learn From Guangzhou Goaland Energy Conservation Tech's P/E?

Guangzhou Goaland Energy Conservation Tech's P/E looks about as weak as its stock price lately. 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.

As we suspected, our examination of Guangzhou Goaland Energy Conservation Tech's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Guangzhou Goaland Energy Conservation Tech (at least 2 which are concerning), and understanding them should be part of your investment process.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.