Some Confidence Is Lacking In Yantai Changyu Pioneer Wine Company Limited's (SZSE:000869) P/E

When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 29x, you may consider Yantai Changyu Pioneer Wine Company Limited (SZSE:000869) as a stock to potentially avoid with its 39.2x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

While the market has experienced earnings growth lately, Yantai Changyu Pioneer Wine's earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Yantai Changyu Pioneer Wine

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

Is There Enough Growth For Yantai Changyu Pioneer Wine?

The only time you'd be truly comfortable seeing a P/E as high as Yantai Changyu Pioneer Wine's is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered virtually the same number to the company's bottom line as the year before. The lack of growth did nothing to help the company's aggregate three-year performance, which is an unsavory 22% drop in EPS. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 19% each year as estimated by the two analysts watching the company. With the market predicted to deliver 25% growth each year, the company is positioned for a weaker earnings result.

With this information, we find it concerning that Yantai Changyu Pioneer Wine 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. 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

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.

We've established that Yantai Changyu Pioneer Wine 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. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You always need to take note of risks, for example - Yantai Changyu Pioneer Wine has 1 warning sign we think you should be aware of.

You might be able to find a better investment than Yantai Changyu Pioneer Wine. 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.