Investors Appear Satisfied With Guilin Layn Natural Ingredients Corp.'s (SZSE:002166) Prospects

When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 34x, you may consider Guilin Layn Natural Ingredients Corp. (SZSE:002166) as a stock to potentially avoid with its 37.6x 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.

Guilin Layn Natural Ingredients certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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How Is Guilin Layn Natural Ingredients' Growth Trending?

In order to justify its P/E ratio, Guilin Layn Natural Ingredients would need to produce impressive growth in excess of the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 187% last year. EPS has also lifted 7.4% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Turning to the outlook, the next year should generate growth of 79% as estimated by the only analyst watching the company. That's shaping up to be materially higher than the 38% growth forecast for the broader market.

In light of this, it's understandable that Guilin Layn Natural Ingredients' P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

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 Guilin Layn Natural Ingredients maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 2 warning signs for Guilin Layn Natural Ingredients you should be aware of, and 1 of them is a bit unpleasant.

Of course, you might also be able to find a better stock than Guilin Layn Natural Ingredients. 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.