Benign Growth For VATS Liquor Chain Store Management Joint Stock Co., Ltd. (SZSE:300755) Underpins Its Share Price

VATS Liquor Chain Store Management Joint Stock Co., Ltd.'s (SZSE:300755) price-to-earnings (or "P/E") ratio of 19.5x 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 27x and even P/E's above 51x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

VATS Liquor Chain Store Management certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If you 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.

Check out our latest analysis for VATS Liquor Chain Store Management

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Does Growth Match The Low P/E?

There's an inherent assumption that a company should underperform the market for P/E ratios like VATS Liquor Chain Store Management's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 20% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 43% drop in EPS in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to climb by 13% each year during the coming three years according to the four analysts following the company. With the market predicted to deliver 23% growth per annum, the company is positioned for a weaker earnings result.

With this information, we can see why VATS Liquor Chain Store Management is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Key Takeaway

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that VATS Liquor Chain Store Management 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.

Before you settle on your opinion, we've discovered 2 warning signs for VATS Liquor Chain Store Management that you should be aware of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.