Anhui Sentai WPC Group Share Co., Ltd. (SZSE:301429) shareholders have had their patience rewarded with a 26% share price jump in the last month. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 21% over that time.
Since its price has surged higher, Anhui Sentai WPC Group Share may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 42.5x, since almost half of all companies in China have P/E ratios under 31x and even P/E's lower than 19x 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.
For instance, Anhui Sentai WPC Group Share'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.
What Are Growth Metrics Telling Us About The High P/E?
The only time you'd be truly comfortable seeing a P/E as high as Anhui Sentai WPC Group Share's is when the company's growth is on track to outshine the market.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 51%. As a result, earnings from three years ago have also fallen 63% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
In contrast to the company, the rest of the market is expected to grow by 38% over the next year, which really puts the company's recent medium-term earnings decline into perspective.
With this information, we find it concerning that Anhui Sentai WPC Group Share is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.
The Bottom Line On Anhui Sentai WPC Group Share's P/E
The large bounce in Anhui Sentai WPC Group Share's shares has lifted the company's P/E to a fairly high level. 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 Anhui Sentai WPC Group Share currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.
And what about other risks? Every company has them, and we've spotted 4 warning signs for Anhui Sentai WPC Group Share (of which 3 are concerning!) you should know about.
You might be able to find a better investment than Anhui Sentai WPC Group Share. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).
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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.