With a price-to-earnings (or "P/E") ratio of 27x Shanxi Xinghuacun Fen Wine Factory Co.,Ltd. (SHSE:600809) may be sending bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 36x and even P/E's higher than 65x are not unusual. 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 have been pleasing for Shanxi Xinghuacun Fen Wine FactoryLtd as its earnings have risen in spite of the market's earnings going into reverse. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Shanxi Xinghuacun Fen Wine FactoryLtd

Is There Any Growth For Shanxi Xinghuacun Fen Wine FactoryLtd?

The only time you'd be truly comfortable seeing a P/E as low as Shanxi Xinghuacun Fen Wine FactoryLtd's is when the company's growth is on track to lag the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 38% last year. The latest three year period has also seen an excellent 277% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 18% per year during the coming three years according to the analysts following the company. That's shaping up to be materially lower than the 23% each year growth forecast for the broader market.

With this information, we can see why Shanxi Xinghuacun Fen Wine FactoryLtd 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

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 Shanxi Xinghuacun Fen Wine FactoryLtd's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Shanxi Xinghuacun Fen Wine FactoryLtd that you should be aware of.

Of course, you might also be able to find a better stock than Shanxi Xinghuacun Fen Wine FactoryLtd. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.