Stock Analysis

Getting In Cheap On Eastroc Beverage(Group) Co., Ltd. (SHSE:605499) Is Unlikely

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Eastroc Beverage(Group) Co., Ltd.'s (SHSE:605499) price-to-earnings (or "P/E") ratio of 40.2x 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 31x and even P/E's below 19x 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 earnings growth that's superior to most other companies of late, Eastroc Beverage(Group) has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Eastroc Beverage(Group)

SHSE:605499 Price to Earnings Ratio vs Industry May 25th 2024
Want the full picture on analyst estimates for the company? Then our free report on Eastroc Beverage(Group) will help you uncover what's on the horizon.

Is There Enough Growth For Eastroc Beverage(Group)?

The only time you'd be truly comfortable seeing a P/E as high as Eastroc Beverage(Group)'s is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered an exceptional 38% gain to the company's bottom line. Pleasingly, EPS has also lifted 99% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 20% per year during the coming three years according to the analysts following the company. That's shaping up to be materially lower than the 26% per year growth forecast for the broader market.

In light of this, it's alarming that Eastroc Beverage(Group)'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. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Eastroc Beverage(Group) 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. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Eastroc Beverage(Group) you should know about.

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.

Valuation is complex, but we're helping make it simple.

Find out whether Eastroc Beverage(Group) is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.