With a price-to-earnings (or "P/E") ratio of 34.3x Chaozhou Three-Circle (Group) Co.,Ltd. (SZSE:300408) may be sending bearish signals at the moment, given that almost half of all companies in China have P/E ratios under 28x and even P/E's lower than 17x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

Chaozhou Three-Circle (Group)Ltd certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Is There Enough Growth For Chaozhou Three-Circle (Group)Ltd?

There's an inherent assumption that a company should outperform the market for P/E ratios like Chaozhou Three-Circle (Group)Ltd's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 26% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 9.3% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 20% each year as estimated by the eight analysts watching the company. With the market predicted to deliver 25% growth per annum, the company is positioned for a weaker earnings result.

In light of this, it's alarming that Chaozhou Three-Circle (Group)Ltd's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Key Takeaway

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 Chaozhou Three-Circle (Group)Ltd currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these 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 Chaozhou Three-Circle (Group)Ltd that you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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