When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 28x, you may consider Shenzhen FRD Science & Technology Co., Ltd. (SZSE:300602) as a stock to avoid entirely with its 52.9x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

Shenzhen FRD Science & Technology 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 Shenzhen FRD Science & Technology?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Shenzhen FRD Science & Technology's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 54% gain to the company's bottom line. Still, incredibly EPS has fallen 34% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 40% each year over the next three years. Meanwhile, the rest of the market is forecast to only expand by 25% per year, which is noticeably less attractive.

With this information, we can see why Shenzhen FRD Science & Technology is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Shenzhen FRD Science & Technology's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

It is also worth noting that we have found 1 warning sign for Shenzhen FRD Science & Technology that you need to take into consideration.

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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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.

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