Subdued Growth No Barrier To Lanzhou Lishang Guochao Industrial Group Co.,Ltd (SHSE:600738) With Shares Advancing 25%

Lanzhou Lishang Guochao Industrial Group Co.,Ltd (SHSE:600738) shares have continued their recent momentum with a 25% gain in the last month alone. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 11% in the last twelve months.

Even after such a large jump in price, it's still not a stretch to say that Lanzhou Lishang Guochao Industrial GroupLtd's price-to-earnings (or "P/E") ratio of 34.8x right now seems quite "middle-of-the-road" compared to the market in China, where the median P/E ratio is around 35x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Lanzhou Lishang Guochao Industrial GroupLtd 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 deteriorate like the rest, which has kept the P/E from rising. 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 not quite in favour.

View our latest analysis for Lanzhou Lishang Guochao Industrial GroupLtd

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Does Growth Match The P/E?

Lanzhou Lishang Guochao Industrial GroupLtd's P/E ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the market.

If we review the last year of earnings growth, the company posted a terrific increase of 202%. However, this wasn't enough as the latest three year period has seen a very unpleasant 15% drop in EPS in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 21% as estimated by the one analyst watching the company. Meanwhile, the rest of the market is forecast to expand by 39%, which is noticeably more attractive.

With this information, we find it interesting that Lanzhou Lishang Guochao Industrial GroupLtd is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

Lanzhou Lishang Guochao Industrial GroupLtd's stock has a lot of momentum behind it lately, which has brought its P/E level with the market. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

Our examination of Lanzhou Lishang Guochao Industrial GroupLtd's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It is also worth noting that we have found 1 warning sign for Lanzhou Lishang Guochao Industrial GroupLtd that you need to take into consideration.

If these risks are making you reconsider your opinion on Lanzhou Lishang Guochao Industrial GroupLtd, 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.