Guangdong Hongtu Technology (holdings) Co.,Ltd.'s (SZSE:002101) price-to-earnings (or "P/E") ratio of 16.5x might make it look like a buy right now compared to the market in China, where around half of the companies have P/E ratios above 29x and even P/E's above 54x 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 limited.

Guangdong Hongtu Technology (holdings)Ltd could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If you still 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.

What Are Growth Metrics Telling Us About The Low P/E?

The only time you'd be truly comfortable seeing a P/E as low as Guangdong Hongtu Technology (holdings)Ltd's is when the company's growth is on track to lag the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 23%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 24% overall rise in EPS. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 12% per annum over the next three years. Meanwhile, the rest of the market is forecast to expand by 24% per annum, which is noticeably more attractive.

With this information, we can see why Guangdong Hongtu Technology (holdings)Ltd is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

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 Hongtu Technology (holdings)Ltd'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.

Before you take the next step, you should know about the 2 warning signs for Guangdong Hongtu Technology (holdings)Ltd that we have uncovered.

Of course, you might also be able to find a better stock than Guangdong Hongtu Technology (holdings)Ltd. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com