China Feihe Limited’s (HKG:6186) business is lagging the market, but its shares are not

Not many people will think that China Feihe Limited (HKG:6186) price-to-earnings (or “P/E”) ratio of 10.2x is worth noting as the average price-to-earnings ratio in Hong Kong compares at around 9x. While this may not raise any eyebrows, if the price-to-earnings ratio is not justified, investors may miss out on a potential opportunity or ignore an impending disappointment.

While the market has seen earnings growth lately, China Feihe’s earnings have been in the opposite direction, which isn’t great. One possibility is that the price/earnings ratio is muted as investors believe this poor earnings performance will turn around. You would really hope so, otherwise you would pay a relatively high price for a company with this kind of growth profile.

Check out our latest analysis for China Feihe

Want to know how analysts think China Feihe’s future compares to the industry? In that case our free report is a good starting point.

Does the growth correspond to the price-earnings ratio?

China Feihe’s price-to-earnings ratio would be typical of a company expected to deliver only moderate growth and, importantly, perform in line with the market.

Looking at the past year’s earnings figures, the company’s profits have dishearteningly fallen to 32%. This means that there is also a decline in earnings in the longer term, as earnings per share have fallen by a total of 55% over the past three years. Shareholders would therefore have felt gloomy about earnings growth in the medium term.

In terms of prospects, the next three years should generate growth of 6.9% per year, as estimated by the analysts covering the company. With the market expected to grow 15% annually, the company is positioned for a weaker earnings performance.

With this information, we find it interesting that China Feihe is trading at a fairly similar price/earnings as the market. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay for exposure to the stock. These shareholders could prepare for future disappointment if the price-earnings ratio falls to a level more in line with growth prospects.

What can we learn from China Feihe’s price-to-earnings ratio?

While the price-to-earnings ratio shouldn’t be the determining factor in whether you buy a stock or not, it is a good barometer of earnings expectations.

We found that China Feihe is currently trading at a higher-than-expected price-to-earnings ratio as its forecast growth is lower than the broader market. We’re not comfortable with the price-to-earnings ratio at this point, as projected future earnings are unlikely to support more positive sentiment for long. Unless these conditions improve, it is challenging to accept these prices as reasonable.

It is always necessary to consider the ever-present specter of investment risk. We have identified it 1 warning sign with China Feiheand understanding should be part of your investment process.

You may be able to find a better investment than China Feihe. If you want a selection of possible candidates, look here free list of interesting companies that trade at a low price/earnings (but have proven that they can grow their profits).

Do you have feedback on this article? Worried about the content? Please contact us directly from us. You can also email the editorial team (at) Simplywallst.com.

This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. We aim to provide you with targeted, long-term analysis based on fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Simply Wall St has no positions in the stocks mentioned.