Liuzhou Liangmianzhen Co., Ltd.'s (SHSE:600249) Shares Climb 26% But Its Business Is Yet to Catch Up

Despite an already strong run, Liuzhou Liangmianzhen Co., Ltd. (SHSE:600249) shares have been powering on, with a gain of 26% in the last thirty days. Notwithstanding the latest gain, the annual share price return of 4.5% isn't as impressive.

After such a large jump in price, Liuzhou Liangmianzhen may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 49x, since almost half of all companies in China have P/E ratios under 35x and even P/E's lower than 20x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Liuzhou Liangmianzhen certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Liuzhou Liangmianzhen

Although there are no analyst estimates available for Liuzhou Liangmianzhen, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Enough Growth For Liuzhou Liangmianzhen?

There's an inherent assumption that a company should outperform the market for P/E ratios like Liuzhou Liangmianzhen's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 55% gain to the company's bottom line. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

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.

With this information, we find it concerning that Liuzhou Liangmianzhen is trading at a P/E higher than the market. 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.

The Key Takeaway

The large bounce in Liuzhou Liangmianzhen's shares has lifted the company's P/E to a fairly high level. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Liuzhou Liangmianzhen currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. 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.

Plus, you should also learn about this 1 warning sign we've spotted with Liuzhou Liangmianzhen.

If these risks are making you reconsider your opinion on Liuzhou Liangmianzhen, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.