Despite an already strong run, Skyworth Digital Co., Ltd. (SZSE:000810) shares have been powering on, with a gain of 35% in the last thirty days. Notwithstanding the latest gain, the annual share price return of 9.7% isn't as impressive.

Following the firm bounce in price, Skyworth Digital may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 48.7x, since almost half of all companies in China have P/E ratios under 36x and even P/E's lower than 20x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Recent times haven't been advantageous for Skyworth Digital as its earnings have been falling quicker than most other companies. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Is There Enough Growth For Skyworth Digital?

In order to justify its P/E ratio, Skyworth Digital would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered a frustrating 31% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 3.4% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 83% during the coming year according to the three analysts following the company. With the market only predicted to deliver 38%, the company is positioned for a stronger earnings result.

With this information, we can see why Skyworth Digital 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 Bottom Line On Skyworth Digital's P/E

Skyworth Digital shares have received a push in the right direction, but its P/E is elevated too. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of Skyworth Digital'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.

Having said that, be aware Skyworth Digital is showing 2 warning signs in our investment analysis, you should know about.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.