When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 33x, you may consider Changzhou Xingyu Automotive Lighting Systems Co.,Ltd. (SHSE:601799) as a stock to potentially avoid with its 38.9x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Changzhou Xingyu Automotive Lighting SystemsLtd certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Changzhou Xingyu Automotive Lighting SystemsLtd

Is There Enough Growth For Changzhou Xingyu Automotive Lighting SystemsLtd?

There's an inherent assumption that a company should outperform the market for P/E ratios like Changzhou Xingyu Automotive Lighting SystemsLtd's to be considered reasonable.

Retrospectively, the last year delivered virtually the same number to the company's bottom line as the year before. The lack of growth did nothing to help the company's aggregate three-year performance, which is an unsavory 3.0% drop in EPS. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the eleven analysts covering the company suggest earnings should grow by 50% over the next year. That's shaping up to be materially higher than the 43% growth forecast for the broader market.

In light of this, it's understandable that Changzhou Xingyu Automotive Lighting SystemsLtd's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On Changzhou Xingyu Automotive Lighting SystemsLtd's P/E

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 Changzhou Xingyu Automotive Lighting SystemsLtd'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. Unless these conditions change, they will continue to provide strong support to the share price.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Changzhou Xingyu Automotive Lighting SystemsLtd (1 is a bit concerning) you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.