Tongqinglou Catering Co., Ltd.'s (SHSE:605108) Shares Leap 32% Yet They're Still Not Telling The Full Story

Tongqinglou Catering Co., Ltd. (SHSE:605108) shares have had a really impressive month, gaining 32% after a shaky period beforehand. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 33% over that time.

In spite of the firm bounce in price, Tongqinglou Catering's price-to-earnings (or "P/E") ratio of 24.2x might still 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 30x and even P/E's above 58x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Tongqinglou Catering certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. 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.

See our latest analysis for Tongqinglou Catering

Keen to find out how analysts think Tongqinglou Catering's future stacks up against the industry? In that case, our free report is a great place to start.

Does Growth Match The Low P/E?

Tongqinglou Catering's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Retrospectively, the last year delivered a decent 8.8% gain to the company's bottom line. This was backed up an excellent period prior to see EPS up by 35% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 28% per annum during the coming three years according to the six analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 19% per year, which is noticeably less attractive.

In light of this, it's peculiar that Tongqinglou Catering's P/E sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Final Word

Despite Tongqinglou Catering's shares building up a head of steam, its P/E still lags most other companies. 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 much lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Tongqinglou Catering (1 is concerning!) that you need to be mindful of.

If you're unsure about the strength of Tongqinglou Catering's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.