Zhejiang Guyuelongshan Shaoxing Wine Co.,Ltd's (SHSE:600059) price-to-earnings (or "P/E") ratio of 18.1x might make it look like a buy right now compared to the market in China, where around half of the companies have P/E ratios above 28x and even P/E's above 52x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Zhejiang Guyuelongshan Shaoxing WineLtd has been doing quite well of late. 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.

Is There Any Growth For Zhejiang Guyuelongshan Shaoxing WineLtd?

In order to justify its P/E ratio, Zhejiang Guyuelongshan Shaoxing WineLtd would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered an exceptional 97% gain to the company's bottom line. The latest three year period has also seen an excellent 109% 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 slump, contracting by 7.8% per year during the coming three years according to the dual analysts following the company. That's not great when the rest of the market is expected to grow by 19% per year.

In light of this, it's understandable that Zhejiang Guyuelongshan Shaoxing WineLtd's P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Bottom Line On Zhejiang Guyuelongshan Shaoxing WineLtd's P/E

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 Zhejiang Guyuelongshan Shaoxing WineLtd maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

Before you settle on your opinion, we've discovered 3 warning signs for Zhejiang Guyuelongshan Shaoxing WineLtd (1 shouldn't be ignored!) that 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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