With a median price-to-earnings (or "P/E") ratio of close to 34x in China, you could be forgiven for feeling indifferent about Avic Aviation High-Technology Co., Ltd.'s (SHSE:600862) P/E ratio of 36.1x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.
Avic Aviation High-Technology certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. One possibility is that the P/E is moderate because investors think the company's earnings will be less resilient moving forward. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.
See our latest analysis for Avic Aviation High-Technology
Is There Some Growth For Avic Aviation High-Technology?
The only time you'd be comfortable seeing a P/E like Avic Aviation High-Technology's is when the company's growth is tracking the market closely.
Taking a look back first, we see that the company grew earnings per share by an impressive 37% last year. As a result, it also grew EPS by 24% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been respectable for the company.
Looking ahead now, EPS is anticipated to climb by 32% during the coming year according to the nine analysts following the company. That's shaping up to be materially lower than the 44% growth forecast for the broader market.
In light of this, it's curious that Avic Aviation High-Technology's P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.
What We Can Learn From Avic Aviation High-Technology's P/E?
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.
We've established that Avic Aviation High-Technology currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.
Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Avic Aviation High-Technology that you should be aware of.
You might be able to find a better investment than Avic Aviation High-Technology. 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).
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.