Chacha Food Company, Limited's (SZSE:002557) Price Is Right But Growth Is Lacking

Chacha Food Company, Limited's (SZSE:002557) price-to-earnings (or "P/E") ratio of 15.5x might make it look like a strong buy right now compared to the market in China, where around half of the companies have P/E ratios above 35x and even P/E's above 67x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

Chacha Food Company 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 might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Check out our latest analysis for Chacha Food Company

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

Is There Any Growth For Chacha Food Company?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Chacha Food Company's to be considered reasonable.

If we review the last year of earnings growth, the company posted a worthy increase of 7.5%. The latest three year period has also seen a 7.4% overall rise in EPS, aided somewhat by its short-term performance. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Looking ahead now, EPS is anticipated to climb by 17% during the coming year according to the analysts following the company. That's shaping up to be materially lower than the 38% growth forecast for the broader market.

In light of this, it's understandable that Chacha Food Company's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Bottom Line On Chacha Food Company's P/E

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 Chacha Food Company maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

A lot of potential risks can sit within a company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Chacha Food Company with six simple checks.

You might be able to find a better investment than Chacha Food Company. 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.