Milkyway Chemical Supply Chain Service Co.,Ltd's (SHSE:603713) Share Price Boosted 27% But Its Business Prospects Need A Lift Too

Despite an already strong run, Milkyway Chemical Supply Chain Service Co.,Ltd (SHSE:603713) shares have been powering on, with a gain of 27% in the last thirty days. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 30% in the last twelve months.

Although its price has surged higher, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 33x, you may still consider Milkyway Chemical Supply Chain ServiceLtd as an attractive investment with its 23x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

While the market has experienced earnings growth lately, Milkyway Chemical Supply Chain ServiceLtd's earnings have gone into reverse gear, which is not great. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

See our latest analysis for Milkyway Chemical Supply Chain ServiceLtd

Keen to find out how analysts think Milkyway Chemical Supply Chain ServiceLtd's future stacks up against the industry? In that case, our free report is a great place to start.

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

In order to justify its P/E ratio, Milkyway Chemical Supply Chain ServiceLtd would need to produce sluggish growth that's trailing 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 17%. Even so, admirably EPS has lifted 45% in aggregate from three years ago, notwithstanding the last 12 months. 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.

Looking ahead now, EPS is anticipated to climb by 19% each year during the coming three years according to the seven analysts following the company. With the market predicted to deliver 26% growth per annum, the company is positioned for a weaker earnings result.

With this information, we can see why Milkyway Chemical Supply Chain ServiceLtd is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Key Takeaway

Despite Milkyway Chemical Supply Chain ServiceLtd's shares building up a head of steam, its P/E still lags most other companies. 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.

As we suspected, our examination of Milkyway Chemical Supply Chain ServiceLtd's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. 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.

It is also worth noting that we have found 2 warning signs for Milkyway Chemical Supply Chain ServiceLtd (1 makes us a bit uncomfortable!) that you need to take into consideration.

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.