With a price-to-earnings (or "P/E") ratio of 39.4x Fujian Torch Electron Technology Co., Ltd. (SHSE:603678) 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 16x 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.

With earnings that are retreating more than the market's of late, Fujian Torch Electron Technology has been very sluggish. It might be that many expect the dismal earnings performance to recover substantially, 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.

What Are Growth Metrics Telling Us About The High P/E?

In order to justify its P/E ratio, Fujian Torch Electron Technology would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered a frustrating 58% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 74% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 38% each year over the next three years. With the market only predicted to deliver 20% per annum, the company is positioned for a stronger earnings result.

With this information, we can see why Fujian Torch Electron Technology is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

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 Fujian Torch Electron Technology maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

Having said that, be aware Fujian Torch Electron Technology is showing 1 warning sign in our investment analysis, you should know about.

Of course, you might also be able to find a better stock than Fujian Torch Electron Technology. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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