When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 28x, you may consider Guotai Junan Securities Co., Ltd. (SHSE:601211) as an attractive investment with its 15.5x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Guotai Junan Securities hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. 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.

Is There Any Growth For Guotai Junan Securities?

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

Retrospectively, the last year delivered a frustrating 31% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 40% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the eleven analysts covering the company suggest earnings should grow by 14% per annum over the next three years. That's shaping up to be materially lower than the 24% each year growth forecast for the broader market.

In light of this, it's understandable that Guotai Junan Securities' 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.

What We Can Learn From Guotai Junan Securities' P/E?

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.

We've established that Guotai Junan Securities 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Guotai Junan Securities that you should be aware of.

Of course, you might also be able to find a better stock than Guotai Junan 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.