Jiangsu Shemar Electric Co.,Ltd (SHSE:603530) shareholders have had their patience rewarded with a 27% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 61% in the last year.
Following the firm bounce in price, Jiangsu Shemar ElectricLtd may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 50.7x, since almost half of all companies in China have P/E ratios under 31x and even P/E's lower than 19x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.
Jiangsu Shemar ElectricLtd certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
SHSE:603530 Price to Earnings Ratio vs Industry May 27th 2024 We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Jiangsu Shemar ElectricLtd's earnings, revenue and cash flow.
How Is Jiangsu Shemar ElectricLtd's Growth Trending?
There's an inherent assumption that a company should far outperform the market for P/E ratios like Jiangsu Shemar ElectricLtd's to be considered reasonable.
Taking a look back first, we see that the company grew earnings per share by an impressive 246% last year. The latest three year period has also seen an excellent 61% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.
Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 38% shows it's noticeably less attractive on an annualised basis.
In light of this, it's alarming that Jiangsu Shemar ElectricLtd's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.
The Bottom Line On Jiangsu Shemar ElectricLtd's P/E
Shares in Jiangsu Shemar ElectricLtd have built up some good momentum lately, which has really inflated its P/E. 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.
Our examination of Jiangsu Shemar ElectricLtd revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.
Before you settle on your opinion, we've discovered 2 warning signs for Jiangsu Shemar ElectricLtd (1 makes us a bit uncomfortable!) that you should be aware of.
If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
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