With a price-to-earnings (or "P/E") ratio of 48.7x Electric Connector Technology Co., Ltd. (SZSE:300679) may be sending very bearish signals at the moment, given that almost half of all companies in China have P/E ratios under 30x and even P/E's lower than 18x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Electric Connector Technology has been struggling lately as its earnings have declined faster than most other companies. 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.

View our latest analysis for Electric Connector Technology

Is There Enough Growth For Electric Connector Technology?

In order to justify its P/E ratio, Electric Connector Technology would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered a frustrating 44% decrease to the company's bottom line. Regardless, EPS has managed to lift by a handy 20% in aggregate from three years ago, thanks to the earlier period of growth. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.

Turning to the outlook, the next year should generate growth of 67% as estimated by the five analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 42%, which is noticeably less attractive.

In light of this, it's understandable that Electric Connector Technology's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Electric Connector Technology's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

You always need to take note of risks, for example - Electric Connector Technology has 1 warning sign we think you should be aware of.

If you're unsure about the strength of Electric Connector Technology'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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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.