Anhui Tongfeng Electronics Company Limited (SHSE:600237) shares have continued their recent momentum with a 32% gain in the last month alone. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 6.7% in the last twelve months.

After such a large jump in price, Anhui Tongfeng Electronics may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 49.6x, since almost half of all companies in China have P/E ratios under 36x and even P/E's lower than 21x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Anhui Tongfeng Electronics has been doing quite well of late. 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.

Is There Enough Growth For Anhui Tongfeng Electronics?

The only time you'd be truly comfortable seeing a P/E as high as Anhui Tongfeng Electronics' is when the company's growth is on track to outshine the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 23% last year. The latest three year period has also seen an excellent 133% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 28% during the coming year according to the two analysts following the company. That's shaping up to be materially lower than the 40% growth forecast for the broader market.

In light of this, it's alarming that Anhui Tongfeng Electronics' P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Key Takeaway

Anhui Tongfeng Electronics shares have received a push in the right direction, but its P/E is elevated too. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Anhui Tongfeng Electronics currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for Anhui Tongfeng Electronics with six simple checks will allow you to discover any risks that could be an issue.

You might be able to find a better investment than Anhui Tongfeng Electronics. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.