When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 34x, you may consider Shenzhen Fortune Trend technology Co., Ltd. (SHSE:688318) as a stock to avoid entirely with its 53.8x 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.
With its earnings growth in positive territory compared to the declining earnings of most other companies, Shenzhen Fortune Trend technology has been doing quite well of late. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors' willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
View our latest analysis for Shenzhen Fortune Trend technology
What Are Growth Metrics Telling Us About The High P/E?
In order to justify its P/E ratio, Shenzhen Fortune Trend technology would need to produce outstanding growth well in excess of the market.
If we review the last year of earnings growth, the company posted a terrific increase of 78%. EPS has also lifted 8.2% in aggregate from three years ago, mostly thanks to the last 12 months of growth. 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 26% during the coming year according to the only analyst following the company. Meanwhile, the rest of the market is forecast to expand by 44%, which is noticeably more attractive.
With this information, we find it concerning that Shenzhen Fortune Trend technology is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.
The Bottom Line On Shenzhen Fortune Trend technology's P/E
Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
We've established that Shenzhen Fortune Trend technology currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.
There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Shenzhen Fortune Trend technology that you should be aware of.
If these risks are making you reconsider your opinion on Shenzhen Fortune Trend technology, explore our interactive list of high quality stocks to get an idea of what else is out there.
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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.