With a price-to-earnings (or "P/E") ratio of 31.9x Jiangsu Olive Sensors High-Tech Co., Ltd. (SZSE:300507) may be sending bearish signals at the moment, given that almost half of all companies in China have P/E ratios under 26x and even P/E's lower than 15x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

For instance, Jiangsu Olive Sensors High-Tech's receding earnings in recent times would have to be some food for thought. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Is There Enough Growth For Jiangsu Olive Sensors High-Tech?

There's an inherent assumption that a company should outperform the market for P/E ratios like Jiangsu Olive Sensors High-Tech's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 51%. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 7.7% in total. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.

This is in contrast to the rest of the market, which is expected to grow by 38% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's alarming that Jiangsu Olive Sensors High-Tech'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 Olive Sensors High-Tech'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.

Our examination of Jiangsu Olive Sensors High-Tech 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. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You need to take note of risks, for example - Jiangsu Olive Sensors High-Tech has 4 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

If you're unsure about the strength of Jiangsu Olive Sensors High-Tech's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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