Zhe Jiang Li Zi Yuan Food Co.,Ltd.'s (SHSE:605337) Shares Not Telling The Full Story

Zhe Jiang Li Zi Yuan Food Co.,Ltd.'s (SHSE:605337) price-to-earnings (or "P/E") ratio of 17.2x might make it look like a buy right now compared to the market in China, where around half of the companies have P/E ratios above 28x and even P/E's above 52x 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 limited.

With earnings that are retreating more than the market's of late, Zhe Jiang Li Zi Yuan FoodLtd has been very sluggish. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. You'd much rather the company wasn't bleeding earnings if you still believe in the business. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.

View our latest analysis for Zhe Jiang Li Zi Yuan FoodLtd

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How Is Zhe Jiang Li Zi Yuan FoodLtd's Growth Trending?

Zhe Jiang Li Zi Yuan FoodLtd's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Retrospectively, the last year delivered a frustrating 22% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 41% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the seven analysts covering the company suggest earnings should grow by 18% per year over the next three years. With the market predicted to deliver 19% growth each year, the company is positioned for a comparable earnings result.

With this information, we find it odd that Zhe Jiang Li Zi Yuan FoodLtd is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting lower selling prices.

The Final Word

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Zhe Jiang Li Zi Yuan FoodLtd currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. There could be some unobserved threats to earnings preventing the P/E ratio from matching the outlook. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

You should always think about risks. Case in point, we've spotted 2 warning signs for Zhe Jiang Li Zi Yuan FoodLtd you should be aware of, and 1 of them is significant.

You might be able to find a better investment than Zhe Jiang Li Zi Yuan FoodLtd. 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.