Earnings Not Telling The Story For Tianjin Guifaxiang 18th Street Mahua Food Co.,Ltd. (SZSE:002820) After Shares Rise 33%

Despite an already strong run, Tianjin Guifaxiang 18th Street Mahua Food Co.,Ltd. (SZSE:002820) shares have been powering on, with a gain of 33% in the last thirty days. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 6.3% in the last twelve months.

After such a large jump in price, Tianjin Guifaxiang 18th Street Mahua FoodLtd may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 62.4x, since almost half of all companies in China have P/E ratios under 34x and even P/E's lower than 20x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

As an illustration, earnings have deteriorated at Tianjin Guifaxiang 18th Street Mahua FoodLtd over the last year, which is not ideal at all. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

Check out our latest analysis for Tianjin Guifaxiang 18th Street Mahua FoodLtd

Although there are no analyst estimates available for Tianjin Guifaxiang 18th Street Mahua FoodLtd, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

What Are Growth Metrics Telling Us About The High P/E?

Tianjin Guifaxiang 18th Street Mahua FoodLtd's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Retrospectively, the last year delivered a frustrating 9.6% decrease to the company's bottom line. Regardless, EPS has managed to lift by a handy 25% in aggregate from three years ago, thanks to the earlier period of growth. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.

Comparing that to the market, which is predicted to deliver 39% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

In light of this, it's alarming that Tianjin Guifaxiang 18th Street Mahua FoodLtd's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

What We Can Learn From Tianjin Guifaxiang 18th Street Mahua FoodLtd's P/E?

Tianjin Guifaxiang 18th Street Mahua FoodLtd's P/E is flying high just like its stock has during the last month. 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 Tianjin Guifaxiang 18th Street Mahua FoodLtd currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You should always think about risks. Case in point, we've spotted 2 warning signs for Tianjin Guifaxiang 18th Street Mahua FoodLtd you should be aware of.

If you're unsure about the strength of Tianjin Guifaxiang 18th Street Mahua FoodLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.