Milkyway Chemical Supply Chain Service Co.,Ltd (SHSE:603713) shares have continued their recent momentum with a 25% gain in the last month alone. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 29% over that time.
Even after such a large jump in price, Milkyway Chemical Supply Chain ServiceLtd's price-to-earnings (or "P/E") ratio of 22.1x might still 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 33x and even P/E's above 61x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
Milkyway Chemical Supply Chain ServiceLtd hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If you still 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 Milkyway Chemical Supply Chain ServiceLtd's Growth Trending?
The only time you'd be truly comfortable seeing a P/E as low as Milkyway Chemical Supply Chain ServiceLtd's is when the company's growth is on track to lag the market.
Retrospectively, the last year delivered a frustrating 17% decrease to the company's bottom line. Even so, admirably EPS has lifted 45% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.
Shifting to the future, estimates from the six analysts covering the company suggest earnings should grow by 19% per year over the next three years. With the market predicted to deliver 25% growth each year, the company is positioned for a weaker earnings result.
With this information, we can see why Milkyway Chemical Supply Chain ServiceLtd 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.
What We Can Learn From Milkyway Chemical Supply Chain ServiceLtd's P/E?
The latest share price surge wasn't enough to lift Milkyway Chemical Supply Chain ServiceLtd's P/E close to the market median. 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 Milkyway Chemical Supply Chain ServiceLtd'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.
Having said that, be aware Milkyway Chemical Supply Chain ServiceLtd is showing 2 warning signs in our investment analysis, and 1 of those is concerning.
If you're unsure about the strength of Milkyway Chemical Supply Chain ServiceLtd'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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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.