Investors Give Tongqinglou Catering Co., Ltd. (SHSE:605108) Shares A 26% Hiding

The Tongqinglou Catering Co., Ltd. (SHSE:605108) share price has softened a substantial 26% over the previous 30 days, handing back much of the gains the stock has made lately. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 27% share price drop.

Even after such a large drop in price, there still wouldn't be many who think Tongqinglou Catering's price-to-earnings (or "P/E") ratio of 30.3x is worth a mention when the median P/E in China is similar at about 34x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

With earnings that are retreating more than the market's of late, Tongqinglou Catering has been very sluggish. It might be that many expect the dismal earnings performance to revert back to market averages soon, which has kept the P/E from falling. You'd much rather the company wasn't bleeding earnings if you still believe in the business. Or at the very least, you'd be hoping it doesn't keep underperforming if your plan is to pick up some stock while it's not in favour.

Check out our latest analysis for Tongqinglou Catering

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Tongqinglou Catering.

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 Tongqinglou Catering's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 11% decrease to the company's bottom line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 16% 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.

Turning to the outlook, the next year should generate growth of 58% as estimated by the five analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 38%, which is noticeably less attractive.

With this information, we find it interesting that Tongqinglou Catering is trading at a fairly similar P/E to the market. It may be that most investors aren't convinced the company can achieve future growth expectations.

What We Can Learn From Tongqinglou Catering's P/E?

Following Tongqinglou Catering's share price tumble, its P/E is now hanging on to the median market P/E. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Tongqinglou Catering currently trades on a lower than expected P/E since its forecast growth is higher than the wider market. There could be some unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. It appears some are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Tongqinglou Catering (of which 1 is significant!) you should know about.

Of course, you might also be able to find a better stock than Tongqinglou Catering. 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.