Guangzhou Development Group Incorporated's (SHSE:600098) price-to-earnings (or "P/E") ratio of 13.9x might 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 32x and even P/E's above 60x are quite common. 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.

With earnings growth that's superior to most other companies of late, Guangzhou Development Group has been doing relatively well. 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.

Is There Any Growth For Guangzhou Development Group?

In order to justify its P/E ratio, Guangzhou Development Group would need to produce anemic growth that's substantially trailing the market.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 12% last year. The solid recent performance means it was also able to grow EPS by 29% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Looking ahead now, EPS is anticipated to climb by 15% each year during the coming three years according to the lone analyst following the company. Meanwhile, the rest of the market is forecast to expand by 25% each year, which is noticeably more attractive.

In light of this, it's understandable that Guangzhou Development Group's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Bottom Line On Guangzhou Development Group's P/E

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Guangzhou Development Group's analyst forecasts revealed that its inferior earnings outlook 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.

You should always think about risks. Case in point, we've spotted 2 warning signs for Guangzhou Development Group you should be aware of, and 1 of them is a bit concerning.

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.