Guangdong Hongtu Technology (holdings) Co.,Ltd.'s (SZSE:002101) price-to-earnings (or "P/E") ratio of 20.3x 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 35x and even P/E's above 69x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Recent times haven't been advantageous for Guangdong Hongtu Technology (holdings)Ltd as its earnings have been falling quicker than most other companies. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. You'd much rather the company wasn't bleeding earnings if you still believe in the business. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.

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 25%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 14% 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.

Looking ahead now, EPS is anticipated to climb by 43% during the coming year according to the two analysts following the company. That's shaping up to be similar to the 42% growth forecast for the broader market.

In light of this, it's peculiar that Guangdong Hongtu Technology (holdings)Ltd's P/E sits below the majority of other companies. It may be that most investors are not convinced the company can achieve future growth expectations.

The Key Takeaway

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Guangdong Hongtu Technology (holdings)Ltd currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. When we see an average earnings outlook with market-like growth, we assume potential risks are what might be placing pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because these conditions should normally provide more support to the share price.

Plus, you should also learn about this 1 warning sign we've spotted with Guangdong Hongtu Technology (holdings)Ltd.

You might be able to find a better investment than Guangdong Hongtu Technology (holdings)Ltd. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.