When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 32x, you may consider GoodWe Technologies Co., Ltd. (SHSE:688390) as an attractive investment with its 22.3x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.
Recent times have been advantageous for GoodWe Technologies as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
SHSE:688390 Price to Earnings Ratio vs Industry April 2nd 2024 Keen to find out how analysts think GoodWe Technologies' future stacks up against the industry? In that case, our free report is a great place to start.
Does Growth Match The Low P/E?
The only time you'd be truly comfortable seeing a P/E as low as GoodWe Technologies' 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 34%. Pleasingly, EPS has also lifted 170% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.
Looking ahead now, EPS is anticipated to climb by 13% per year during the coming three years according to the nine analysts following the company. That's shaping up to be materially lower than the 20% per year growth forecast for the broader market.
In light of this, it's understandable that GoodWe Technologies' 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 Key Takeaway
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 GoodWe Technologies 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.
Before you take the next step, you should know about the 2 warning signs for GoodWe Technologies that we have uncovered.
Of course, you might also be able to find a better stock than GoodWe Technologies. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
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