There's Reason For Concern Over Shanxi Xinghuacun Fen Wine Factory Co.,Ltd.'s (SHSE:600809) Price

There wouldn't be many who think Shanxi Xinghuacun Fen Wine Factory Co.,Ltd.'s (SHSE:600809) price-to-earnings (or "P/E") ratio of 29.6x is worth a mention when the median P/E in China is similar at about 31x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Shanxi Xinghuacun Fen Wine FactoryLtd certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. 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 not quite in favour.

View our latest analysis for Shanxi Xinghuacun Fen Wine FactoryLtd

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Is There Some Growth For Shanxi Xinghuacun Fen Wine FactoryLtd?

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

If we review the last year of earnings growth, the company posted a terrific increase of 38%. The latest three year period has also seen an excellent 277% overall rise in EPS, aided by its short-term performance. 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 18% per year during the coming three years according to the analysts following the company. That's shaping up to be materially lower than the 20% each year growth forecast for the broader market.

With this information, we find it interesting that Shanxi Xinghuacun Fen Wine FactoryLtd is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

What We Can Learn From Shanxi Xinghuacun Fen Wine FactoryLtd's P/E?

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

Our examination of Shanxi Xinghuacun Fen Wine FactoryLtd's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Shanxi Xinghuacun Fen Wine FactoryLtd that you need to be mindful of.

If these risks are making you reconsider your opinion on Shanxi Xinghuacun Fen Wine FactoryLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.