Kuaijishan Shaoxing Rice Wine Co., Ltd.'s (SHSE:601579) Shares May Have Run Too Fast Too Soon

It's not a stretch to say that Kuaijishan Shaoxing Rice Wine Co., Ltd.'s (SHSE:601579) price-to-earnings (or "P/E") ratio of 26.5x right now seems quite "middle-of-the-road" compared to the market in China, where the median P/E ratio is around 28x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Kuaijishan Shaoxing Rice Wine 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 moderate because investors think the company's earnings will be less resilient moving forward. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Check out our latest analysis for Kuaijishan Shaoxing Rice Wine

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Kuaijishan Shaoxing Rice Wine.

How Is Kuaijishan Shaoxing Rice Wine's Growth Trending?

There's an inherent assumption that a company should be matching the market for P/E ratios like Kuaijishan Shaoxing Rice Wine's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 27% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 44% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 3.7% during the coming year according to the one analyst following the company. Meanwhile, the rest of the market is forecast to expand by 36%, which is noticeably more attractive.

In light of this, it's curious that Kuaijishan Shaoxing Rice Wine's P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

The Key Takeaway

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Kuaijishan Shaoxing Rice Wine'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.

Having said that, be aware Kuaijishan Shaoxing Rice Wine is showing 1 warning sign in our investment analysis, you should know about.

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.