When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 34x, you may consider Sichuan Jiuyuan Yinhai Software.Co.,Ltd (SZSE:002777) as a stock to avoid entirely with its 61.4x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.
Sichuan Jiuyuan Yinhai Software.Co.Ltd has been struggling lately as its earnings have declined faster 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.
View our latest analysis for Sichuan Jiuyuan Yinhai Software.Co.Ltd
Does Growth Match The High P/E?
The only time you'd be truly comfortable seeing a P/E as steep as Sichuan Jiuyuan Yinhai Software.Co.Ltd's is when the company's growth is on track to outshine the market decidedly.
Retrospectively, the last year delivered a frustrating 24% decrease to the company's bottom line. Unfortunately, that's brought it right back to where it started three years ago with EPS growth being virtually non-existent overall during that time. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.
Turning to the outlook, the next year should generate growth of 57% as estimated by the three analysts watching the company. That's shaping up to be materially higher than the 44% growth forecast for the broader market.
In light of this, it's understandable that Sichuan Jiuyuan Yinhai Software.Co.Ltd'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.
What We Can Learn From Sichuan Jiuyuan Yinhai Software.Co.Ltd's P/E?
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.
We've established that Sichuan Jiuyuan Yinhai Software.Co.Ltd 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. Unless these conditions change, they will continue to provide strong support to the share price.
The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Sichuan Jiuyuan Yinhai Software.Co.Ltd with six simple checks on some of these key factors.
If you're unsure about the strength of Sichuan Jiuyuan Yinhai Software.Co.Ltd'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.