There wouldn't be many who think Qingdao Foods CO.,LTD.'s (SZSE:001219) price-to-earnings (or "P/E") ratio of 34.2x is worth a mention when the median P/E in China is similar at about 32x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

It looks like earnings growth has deserted Qingdao FoodsLTD recently, which is not something to boast about. It might be that many expect the uninspiring earnings performance to only match most other companies at best over the coming period, which has kept the P/E from rising. If not, then existing shareholders may be feeling hopeful about the future direction of the share price.

Check out our latest analysis for Qingdao FoodsLTD

What Are Growth Metrics Telling Us About The P/E?

Qingdao FoodsLTD'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.

Taking a look back first, we see that there was hardly any earnings per share growth to speak of for the company over the past year. The lack of growth did nothing to help the company's aggregate three-year performance, which is an unsavory 9.7% drop in EPS. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 43% shows it's an unpleasant look.

With this information, we find it concerning that Qingdao FoodsLTD is trading at a fairly similar P/E to the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

What We Can Learn From Qingdao FoodsLTD's P/E?

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of Qingdao FoodsLTD revealed its shrinking earnings over the medium-term aren't impacting its P/E as much as we would have predicted, given the market is set to grow. Right now we are uncomfortable with the P/E as this earnings performance is unlikely to support a more positive sentiment for long. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

It is also worth noting that we have found 2 warning signs for Qingdao FoodsLTD (1 is a bit unpleasant!) that you need to take into consideration.

Of course, you might also be able to find a better stock than Qingdao FoodsLTD. 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.