Investor Optimism Abounds Sanjiang Shopping Club Co.,Ltd (SHSE:601116) But Growth Is Lacking

With a price-to-earnings (or "P/E") ratio of 36.6x Sanjiang Shopping Club Co.,Ltd (SHSE:601116) may be sending bearish signals at the moment, given that almost half of all companies in China have P/E ratios under 30x and even P/E's lower than 18x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

For example, consider that Sanjiang Shopping ClubLtd's financial performance has been poor lately as its earnings have been in decline. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Sanjiang Shopping ClubLtd

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Sanjiang Shopping ClubLtd's earnings, revenue and cash flow.

How Is Sanjiang Shopping ClubLtd's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as high as Sanjiang Shopping ClubLtd's is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered a frustrating 14% decrease to the company's bottom line. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 7.5% in total. 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.

Comparing that to the market, which is predicted to deliver 39% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

In light of this, it's alarming that Sanjiang Shopping ClubLtd's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

What We Can Learn From Sanjiang Shopping ClubLtd's P/E?

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.

Our examination of Sanjiang Shopping ClubLtd revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Having said that, be aware Sanjiang Shopping ClubLtd is showing 1 warning sign in our investment analysis, you should know about.

Of course, you might also be able to find a better stock than Sanjiang Shopping ClubLtd. 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.