With a price-to-earnings (or "P/E") ratio of 14.2x Anhui Kouzi Distillery Co., Ltd. (SHSE:603589) may be sending very bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 37x and even P/E's higher than 71x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

There hasn't been much to differentiate Anhui Kouzi Distillery's and the market's retreating earnings lately. One possibility is that the P/E is low because investors think the company's earnings may begin to slide even faster. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. At the very least, you'd be hoping that earnings don't fall off a cliff if your plan is to pick up some stock while it's out of favour.

How Is Anhui Kouzi Distillery's Growth Trending?

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

If we review the last year of earnings, the company posted a result that saw barely any deviation from a year ago. Fortunately, a few good years before that means that it was still able to grow EPS by 7.6% in total over the last three years. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 11% as estimated by the ten analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 38%, which is noticeably more attractive.

In light of this, it's understandable that Anhui Kouzi Distillery's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Key Takeaway

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Anhui Kouzi Distillery's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. 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 1 warning sign for Anhui Kouzi Distillery that you should be aware of.

You might be able to find a better investment than Anhui Kouzi Distillery. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.