Suzhou Weizhixiang Food Co., Ltd.'s (SHSE:605089) Shares Climb 35% But Its Business Is Yet to Catch Up

Despite an already strong run, Suzhou Weizhixiang Food Co., Ltd. (SHSE:605089) shares have been powering on, with a gain of 35% in the last thirty days. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 31% over that time.

Although its price has surged higher, you could still be forgiven for feeling indifferent about Suzhou Weizhixiang Food's P/E ratio of 39.2x, since the median price-to-earnings (or "P/E") ratio in China is also close to 36x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Suzhou Weizhixiang Food has been struggling lately as its earnings have declined faster than most other companies. It might be that many expect the dismal earnings performance to revert back to market averages soon, which has kept the P/E from falling. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. If not, then existing shareholders may be a little nervous about the viability of the share price.

View our latest analysis for Suzhou Weizhixiang Food

Keen to find out how analysts think Suzhou Weizhixiang Food's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Suzhou Weizhixiang Food's Growth Trending?

In order to justify its P/E ratio, Suzhou Weizhixiang Food would need to produce growth that's similar to the market.

Retrospectively, the last year delivered a frustrating 32% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 38% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 12% as estimated by the four analysts watching the company. With the market predicted to deliver 39% growth , the company is positioned for a weaker earnings result.

In light of this, it's curious that Suzhou Weizhixiang Food'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 Bottom Line On Suzhou Weizhixiang Food's P/E

Suzhou Weizhixiang Food appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. 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.

Our examination of Suzhou Weizhixiang Food'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. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

You always need to take note of risks, for example - Suzhou Weizhixiang Food has 1 warning sign we think you should be aware of.

Of course, you might also be able to find a better stock than Suzhou Weizhixiang Food. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.