With a price-to-earnings (or "P/E") ratio of 21.6x Guangdong DFP New Material Group Co., Ltd. (SHSE:601515) may be sending bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 27x and even P/E's higher than 48x 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 limited.
With earnings that are retreating more than the market's of late, Guangdong DFP New Material Group has been very sluggish. 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. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.
How Is Guangdong DFP New Material Group's Growth Trending?
The only time you'd be truly comfortable seeing a P/E as low as Guangdong DFP New Material Group's is when the company's growth is on track to lag the market.
Retrospectively, the last year delivered a frustrating 53% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 18% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Looking ahead now, EPS is anticipated to climb by 0.9% during the coming year according to the lone analyst following the company. Meanwhile, the rest of the market is forecast to expand by 41%, which is noticeably more attractive.
In light of this, it's understandable that Guangdong DFP New Material Group'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 Guangdong DFP New Material Group'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.
Plus, you should also learn about these 2 warning signs we've spotted with Guangdong DFP New Material Group.
If you're unsure about the strength of Guangdong DFP New Material Group'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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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.