Insufficient Growth At Zhejiang Guyuelongshan Shaoxing Wine Co.,Ltd (SHSE:600059) Hampers Share Price

With a price-to-earnings (or "P/E") ratio of 18.2x Zhejiang Guyuelongshan Shaoxing Wine Co.,Ltd (SHSE:600059) may be sending bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 30x and even P/E's higher than 55x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Recent times have been advantageous for Zhejiang Guyuelongshan Shaoxing WineLtd as its earnings have been rising faster 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.

See our latest analysis for Zhejiang Guyuelongshan Shaoxing WineLtd

Keen to find out how analysts think Zhejiang Guyuelongshan Shaoxing WineLtd'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?

In order to justify its P/E ratio, Zhejiang Guyuelongshan Shaoxing WineLtd would need to produce sluggish growth that's trailing the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 125% last year. The strong recent performance means it was also able to grow EPS by 110% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 11% per year as estimated by the three analysts watching the company. Meanwhile, the broader market is forecast to expand by 25% each year, which paints a poor picture.

In light of this, it's understandable that Zhejiang Guyuelongshan Shaoxing WineLtd's P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Bottom Line On Zhejiang Guyuelongshan Shaoxing WineLtd's P/E

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Zhejiang Guyuelongshan Shaoxing WineLtd's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. 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.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Zhejiang Guyuelongshan Shaoxing WineLtd (1 can't be ignored!) that you should be aware of before investing here.

Of course, you might also be able to find a better stock than Zhejiang Guyuelongshan Shaoxing WineLtd. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com