There wouldn't be many who think Sanjiang Shopping Club Co.,Ltd's (SHSE:601116) price-to-earnings (or "P/E") ratio of 36.8x is worth a mention when the median P/E in China is similar at about 34x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.
The earnings growth achieved at Sanjiang Shopping ClubLtd over the last year would be more than acceptable for most companies. One possibility is that the P/E is moderate because investors think this respectable earnings growth might not be enough to outperform the broader market in the near future. 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 not quite in favour.
View our latest analysis for Sanjiang Shopping ClubLtd
Does Growth Match The P/E?
The only time you'd be comfortable seeing a P/E like Sanjiang Shopping ClubLtd's is when the company's growth is tracking the market closely.
Taking a look back first, we see that the company grew earnings per share by an impressive 17% last year. As a result, it also grew EPS by 15% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.
This is in contrast to the rest of the market, which is expected to grow by 43% over the next year, materially higher than the company's recent medium-term annualised growth rates.
In light of this, it's curious that Sanjiang Shopping ClubLtd's P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as a continuation of recent earnings trends is likely to weigh down the shares eventually.
The Final Word
While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
Our examination of Sanjiang Shopping ClubLtd revealed its three-year earnings trends aren't impacting its P/E as much as we would have predicted, given they look worse than current market expectations. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.
Before you settle on your opinion, we've discovered 1 warning sign for Sanjiang Shopping ClubLtd that you should be aware of.
Of course, you might also be able to find a better stock than Sanjiang Shopping ClubLtd. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
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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.