The Hebei Hengshui Laobaigan Liquor Co., Ltd. (SHSE:600559) share price has done very well over the last month, posting an excellent gain of 38%. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 20% in the last twelve months.
Although its price has surged higher, you could still be forgiven for feeling indifferent about Hebei Hengshui Laobaigan Liquor's P/E ratio of 32.3x, since the median price-to-earnings (or "P/E") ratio in China is also close to 32x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.
Hebei Hengshui Laobaigan Liquor certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.
How Is Hebei Hengshui Laobaigan Liquor's Growth Trending?
The only time you'd be comfortable seeing a P/E like Hebei Hengshui Laobaigan Liquor's is when the company's growth is tracking the market closely.
Taking a look back first, we see that the company grew earnings per share by an impressive 30% last year. The latest three year period has also seen an excellent 125% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Looking ahead now, EPS is anticipated to climb by 21% per year during the coming three years according to the four analysts following the company. With the market predicted to deliver 26% growth each year, the company is positioned for a weaker earnings result.
In light of this, it's curious that Hebei Hengshui Laobaigan Liquor'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 Key Takeaway
Hebei Hengshui Laobaigan Liquor's stock has a lot of momentum behind it lately, which has brought its P/E level with the market. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
We've established that Hebei Hengshui Laobaigan Liquor 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. Unless these conditions improve, it's challenging to accept these prices as being reasonable.
You always need to take note of risks, for example - Hebei Hengshui Laobaigan Liquor has 1 warning sign we think you should be aware of.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.
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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.