Shanxi Xinghuacun Fen Wine Factory Co.,Ltd.'s (SHSE:600809) Prospects Need A Boost To Lift Shares

With a price-to-earnings (or "P/E") ratio of 17.9x Shanxi Xinghuacun Fen Wine Factory Co.,Ltd. (SHSE:600809) may be sending bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 32x and even P/E's higher than 62x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Shanxi Xinghuacun Fen Wine FactoryLtd has been doing quite well of late. 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.

Check out our latest analysis for Shanxi Xinghuacun Fen Wine FactoryLtd

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

Is There Any Growth For Shanxi Xinghuacun Fen Wine FactoryLtd?

In order to justify its P/E ratio, Shanxi Xinghuacun Fen Wine FactoryLtd would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered an exceptional 18% gain to the company's bottom line. The latest three year period has also seen an excellent 125% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 16% per annum over the next three years. With the market predicted to deliver 21% growth per year, the company is positioned for a weaker earnings result.

In light of this, it's understandable that Shanxi Xinghuacun Fen Wine FactoryLtd's P/E sits below the majority of other companies. 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

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Shanxi Xinghuacun Fen Wine FactoryLtd's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Shanxi Xinghuacun Fen Wine FactoryLtd, and understanding should be part of your investment process.

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.