Wuliangye Yibin Co.,Ltd. (SZSE:000858) shares have had a really impressive month, gaining 32% after a shaky period beforehand. Notwithstanding the latest gain, the annual share price return of 4.1% isn't as impressive.

Even after such a large jump in price, Wuliangye YibinLtd may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 19.6x, since almost half of all companies in China have P/E ratios greater than 30x and even P/E's higher than 58x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Wuliangye YibinLtd 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 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 out of favour.

How Is Wuliangye YibinLtd's Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like Wuliangye YibinLtd's to be considered reasonable.

If we review the last year of earnings growth, the company posted a worthy increase of 13%. This was backed up an excellent period prior to see EPS up by 45% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 13% per annum during the coming three years according to the analysts following the company. Meanwhile, the rest of the market is forecast to expand by 19% per year, which is noticeably more attractive.

With this information, we can see why Wuliangye YibinLtd is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Final Word

The latest share price surge wasn't enough to lift Wuliangye YibinLtd's P/E close to the market median. 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.

We've established that Wuliangye YibinLtd maintains its low P/E on the weakness of its forecast growth being lower than the wider market, 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.

A lot of potential risks can sit within a company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Wuliangye YibinLtd with six simple checks.

If you're unsure about the strength of Wuliangye YibinLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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