Earnings Not Telling The Story For Foshan Haitian Flavouring and Food Company Ltd. (SHSE:603288)

When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 26x, you may consider Foshan Haitian Flavouring and Food Company Ltd. (SHSE:603288) as a stock to potentially avoid with its 32.6x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Foshan Haitian Flavouring and Food could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Check out our latest analysis for Foshan Haitian Flavouring and Food

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What Are Growth Metrics Telling Us About The High P/E?

In order to justify its P/E ratio, Foshan Haitian Flavouring and Food would need to produce impressive growth in excess of the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 4.1%. The last three years don't look nice either as the company has shrunk EPS by 13% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 11% per year over the next three years. With the market predicted to deliver 23% growth per year, the company is positioned for a weaker earnings result.

In light of this, it's alarming that Foshan Haitian Flavouring and Food's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

What We Can Learn From Foshan Haitian Flavouring and Food'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.

We've established that Foshan Haitian Flavouring and Food currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Foshan Haitian Flavouring and Food (1 is a bit concerning) you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.