With a price-to-earnings (or "P/E") ratio of 40.7x Jiugui Liquor Co., Ltd. (SZSE:000799) may be sending bearish signals at the moment, given that almost half of all companies in China have P/E ratios under 33x and even P/E's lower than 20x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.
Jiugui Liquor has been struggling lately as its earnings have declined faster than most other companies. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.
View our latest analysis for Jiugui Liquor
Is There Enough Growth For Jiugui Liquor?
Jiugui Liquor's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 51%. Regardless, EPS has managed to lift by a handy 24% in aggregate from three years ago, thanks to the earlier period of growth. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.
Turning to the outlook, the next three years should generate growth of 33% per year as estimated by the analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 22% per year, which is noticeably less attractive.
In light of this, it's understandable that Jiugui Liquor's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
The Final Word
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.
As we suspected, our examination of Jiugui Liquor's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.
You should always think about risks. Case in point, we've spotted 2 warning signs for Jiugui Liquor you should be aware of, and 1 of them can't be ignored.
If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
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.