Lily Group Co., Ltd. (SHSE:603823) shares have retraced a considerable 29% in the last month, reversing a fair amount of their solid recent performance. The recent drop has obliterated the annual return, with the share price now down 9.2% over that longer period.

Although its price has dipped substantially, it's still not a stretch to say that Lily Group's price-to-earnings (or "P/E") ratio of 29.2x right now seems quite "middle-of-the-road" compared to the market in China, where the median P/E ratio is around 30x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

While the market has experienced earnings growth lately, Lily Group's earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to strengthen positively, which has kept the P/E from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

Is There Some Growth For Lily Group?

There's an inherent assumption that a company should be matching the market for P/E ratios like Lily Group's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 11%. This means it has also seen a slide in earnings over the longer-term as EPS is down 52% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the one analyst covering the company suggest earnings should grow by 13% over the next year. Meanwhile, the rest of the market is forecast to expand by 37%, which is noticeably more attractive.

In light of this, it's curious that Lily Group's P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

The Final Word

Lily Group's plummeting stock price has brought its P/E right back to the rest of 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.

We've established that Lily Group currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Plus, you should also learn about these 2 warning signs we've spotted with Lily Group (including 1 which can't be ignored).

Of course, you might also be able to find a better stock than Lily Group. 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.

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