With a price-to-earnings (or "P/E") ratio of 49.2x Guangdong Tecsun Science & Technology Co.,Ltd. (SZSE:002908) may be sending bearish signals at the moment, given that almost half of all companies in China have P/E ratios under 33x 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.
Guangdong Tecsun Science & TechnologyLtd has been doing a decent job lately as it's been growing earnings at a reasonable pace. One possibility is that the P/E is high because investors think this good earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
See our latest analysis for Guangdong Tecsun Science & TechnologyLtd
Is There Enough Growth For Guangdong Tecsun Science & TechnologyLtd?
There's an inherent assumption that a company should outperform the market for P/E ratios like Guangdong Tecsun Science & TechnologyLtd's to be considered reasonable.
If we review the last year of earnings growth, the company posted a worthy increase of 7.0%. This was backed up an excellent period prior to see EPS up by 40% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.
Comparing that to the market, which is predicted to deliver 44% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.
With this information, we find it concerning that Guangdong Tecsun Science & TechnologyLtd is trading at a P/E higher than the market. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.
The Key Takeaway
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 Guangdong Tecsun Science & TechnologyLtd currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.
Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Guangdong Tecsun Science & TechnologyLtd that you should be aware of.
Of course, you might also be able to find a better stock than Guangdong Tecsun Science & TechnologyLtd. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
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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.
