Some Confidence Is Lacking In Foshan Haitian Flavouring and Food Company Ltd.'s (SHSE:603288) P/E

Foshan Haitian Flavouring and Food Company Ltd.'s (SHSE:603288) price-to-earnings (or "P/E") ratio of 42.3x might make it look like a sell right now compared to the market in China, where around half of the companies have P/E ratios below 36x and even P/E's below 21x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Foshan Haitian Flavouring and Food has been doing quite well of late. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Foshan Haitian Flavouring and Food

Want the full picture on analyst estimates for the company? Then our free report on Foshan Haitian Flavouring and Food will help you uncover what's on the horizon.

Does Growth Match The High P/E?

Foshan Haitian Flavouring and Food's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 4.7% last year. Still, lamentably EPS has fallen 6.2% in aggregate from three years ago, which is disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next three years should generate growth of 12% per annum as estimated by the analysts watching the company. That's shaping up to be materially lower than the 21% per year growth forecast for the broader market.

With this information, we find it concerning that Foshan Haitian Flavouring and Food is trading at a P/E higher than the market. 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.

The Key Takeaway

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

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. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You should always think about risks. Case in point, we've spotted 1 warning sign for Foshan Haitian Flavouring and Food you should be aware of.

You might be able to find a better investment than Foshan Haitian Flavouring and Food. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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

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.