Anhui Kouzi Distillery Co., Ltd.'s (SHSE:603589) Share Price Is Matching Sentiment Around Its Earnings

Anhui Kouzi Distillery Co., Ltd.'s (SHSE:603589) price-to-earnings (or "P/E") ratio of 13.1x might make it look like a strong buy right now compared to the market in China, where around half of the companies have P/E ratios above 37x and even P/E's above 72x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

Anhui Kouzi Distillery's negative earnings growth of late has neither been better nor worse than most other companies. One possibility is that the P/E is low because investors think the company's earnings may begin to slide even faster. You'd much rather the company wasn't bleeding earnings if you still believe in the business. In saying that, existing shareholders may feel hopeful about the share price if the company's earnings continue tracking the market.

Check out our latest analysis for Anhui Kouzi Distillery

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Anhui Kouzi Distillery.

Does Growth Match The Low P/E?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Anhui Kouzi Distillery's to be considered reasonable.

Retrospectively, the last year delivered virtually the same number to the company's bottom line as the year before. Regardless, EPS has managed to lift by a handy 7.6% in aggregate from three years ago, thanks to the earlier period of growth. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Shifting to the future, estimates from the nine analysts covering the company suggest earnings should grow by 8.1% over the next year. With the market predicted to deliver 37% growth , the company is positioned for a weaker earnings result.

With this information, we can see why Anhui Kouzi Distillery is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Key Takeaway

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.

As we suspected, our examination of Anhui Kouzi Distillery's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Having said that, be aware Anhui Kouzi Distillery is showing 1 warning sign in our investment analysis, you should know about.

You might be able to find a better investment than Anhui Kouzi Distillery. 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).

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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.