Investors Aren't Buying Guangdong TCL Smart Home Appliances Co., Ltd.'s (SZSE:002668) Earnings

With a price-to-earnings (or "P/E") ratio of 10.5x Guangdong TCL Smart Home Appliances Co., Ltd. (SZSE:002668) may be sending very bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 27x and even P/E's higher than 51x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

With earnings growth that's superior to most other companies of late, Guangdong TCL Smart Home Appliances 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.

View our latest analysis for Guangdong TCL Smart Home Appliances

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How Is Guangdong TCL Smart Home Appliances' Growth Trending?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Guangdong TCL Smart Home Appliances' to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 25% last year. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 8.1% each year over the next three years. With the market predicted to deliver 22% growth each year, the company is positioned for a weaker earnings result.

In light of this, it's understandable that Guangdong TCL Smart Home Appliances' 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 Key Takeaway

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Guangdong TCL Smart Home Appliances maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. 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.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for Guangdong TCL Smart Home Appliances with six simple checks will allow you to discover any risks that could be an issue.

Of course, you might also be able to find a better stock than Guangdong TCL Smart Home Appliances. 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.