Milkyway Chemical Supply Chain Service Co.,Ltd (SHSE:603713) Soars 28% But It's A Story Of Risk Vs Reward

Those holding Milkyway Chemical Supply Chain Service Co.,Ltd (SHSE:603713) shares would be relieved that the share price has rebounded 28% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. But the last month did very little to improve the 61% share price decline over the last year.

In spite of the firm bounce in price, Milkyway Chemical Supply Chain ServiceLtd's price-to-earnings (or "P/E") ratio of 15.4x might still make it look like a buy right now compared to the market in China, where around half of the companies have P/E ratios above 31x and even P/E's above 56x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Recent times haven't been advantageous for Milkyway Chemical Supply Chain ServiceLtd as its earnings have been falling quicker than most other companies. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.

View our latest analysis for Milkyway Chemical Supply Chain ServiceLtd

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Milkyway Chemical Supply Chain ServiceLtd.

How Is Milkyway Chemical Supply Chain ServiceLtd's Growth Trending?

Milkyway Chemical Supply Chain ServiceLtd's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 12%. Still, the latest three year period has seen an excellent 90% overall rise in EPS, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Turning to the outlook, the next year should generate growth of 38% as estimated by the seven analysts watching the company. With the market predicted to deliver 41% growth , the company is positioned for a comparable earnings result.

With this information, we find it odd that Milkyway Chemical Supply Chain ServiceLtd is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting lower selling prices.

The Bottom Line On Milkyway Chemical Supply Chain ServiceLtd's P/E

The latest share price surge wasn't enough to lift Milkyway Chemical Supply Chain ServiceLtd's P/E close to the market median. 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 Milkyway Chemical Supply Chain ServiceLtd currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. When we see an average earnings outlook with market-like growth, we assume potential risks are what might be placing pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because these conditions should normally provide more support to the share price.

Before you take the next step, you should know about the 2 warning signs for Milkyway Chemical Supply Chain ServiceLtd (1 is significant!) that we have uncovered.

You might be able to find a better investment than Milkyway Chemical Supply Chain ServiceLtd. 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.