Some Shareholders Feeling Restless Over Shenzhen Agricultural Products Group Co., Ltd.'s (SZSE:000061) P/E Ratio

With a median price-to-earnings (or "P/E") ratio of close to 31x in China, you could be forgiven for feeling indifferent about Shenzhen Agricultural Products Group Co., Ltd.'s (SZSE:000061) P/E ratio of 29.7x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Shenzhen Agricultural Products Group certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. The P/E is probably moderate because investors think this strong earnings growth might not be enough to outperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

See our latest analysis for Shenzhen Agricultural Products Group

Although there are no analyst estimates available for Shenzhen Agricultural Products Group, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

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

There's an inherent assumption that a company should be matching the market for P/E ratios like Shenzhen Agricultural Products Group's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 72% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 13% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

In contrast to the company, the rest of the market is expected to grow by 41% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we find it concerning that Shenzhen Agricultural Products Group is trading at a fairly similar P/E to the market. It seems most investors are ignoring the recent poor growth rate 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 the recent negative growth rates.

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.

Our examination of Shenzhen Agricultural Products Group revealed its shrinking earnings over the medium-term aren't impacting its P/E as much as we would have predicted, given the market is set to grow. Right now we are uncomfortable with the P/E as this earnings performance is unlikely to support a more positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Shenzhen Agricultural Products Group (1 is potentially serious!) that you should be aware of before investing here.

If these risks are making you reconsider your opinion on Shenzhen Agricultural Products Group, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.