When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 32x, you may consider Guoyuan Securities Company Limited (SZSE:000728) as a highly attractive investment with its 15.6x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Guoyuan Securities certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. 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.

Is There Any Growth For Guoyuan Securities?

The only time you'd be truly comfortable seeing a P/E as depressed as Guoyuan Securities' is when the company's growth is on track to lag the market decidedly.

Retrospectively, the last year delivered a decent 7.5% gain to the company's bottom line. The solid recent performance means it was also able to grow EPS by 9.7% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 6.5% per year during the coming three years according to the five analysts following the company. Meanwhile, the rest of the market is forecast to expand by 20% per year, which is noticeably more attractive.

With this information, we can see why Guoyuan Securities 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 Final Word

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Guoyuan Securities' 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.

Before you take the next step, you should know about the 2 warning signs for Guoyuan Securities (1 is potentially serious!) that we have uncovered.

Of course, you might also be able to find a better stock than Guoyuan Securities. 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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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.